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POLITICAL ECONOMY 



BY 

FRANCIS A. WALKER 

President of the Massachusetts Institute of Technology, 

AUTHOR OF "THE WAGES QUESTION," "MONET," "MONEY, TRADE 
AND INDUSTRY," "LAND AND ITS RENT," ETC. 



THIRD EDITION, REVISED AND ENLARGED. 




NEW YORK 
HENRY HOLT AND COMPANY 

1888 






COPYKIGHT, 1887, 
BY 

HENRY HOLT & CO. 

J0.18 S .9JS<, 



THE MERSHON COMPANY PRES6, 
RAHWAY, N. J., U. S. A. 










CONTENTS. 



PART f . 

Chabacteb and Logical Method of Political Economy, 



PA9B. 

- 1 



PART II. 

PRODUCTION. 

Chapter I. Land and Natural Agents, ------- 33 

V II. Labok, _______ ._-4j. 

" III. Capital : Its Oeigin and Office, __-■•'■•- -61 

41 IV. The Productive Capability of a CommunitI - 69 



PART III. 

EXCHANGE. 

Chapter I. The Theory of Value, - - - - 

. " II. The Theory of International Exchanges, 

" III. Money and its Value, ----- 

" IV. Money and its Value — {Continued.) — 
Debased Coin : Seigniorage - 

" V. Inconvertible Paper Money, 

" VI. IBank Money, 

*• VII. The Reaction of Exchange upon Production- 



78 
111 
120 

143 
152 
166 
171 



PART IV. 

DISTRIBUTION. 

^Chapter I. The Parties to the Distribution of Wealth, 
" II. Rent, - - 

" HI. Interest, - - -- 



187 
193 
218 



VI CONTENTS. 

Chapter IV. Profits, ---------- 232' 

*/*' V. Wages, - - 245- ^ 

" VI. Wages Continued: The Condition of the Laboring 

Class, as Affected by Imperfect Competition, 25ft ^ 

" VII. Two Other Shares in Distribution, -' 272 

" VIII. The Reaction of Distribution Upon Production, - 27ft 



PART V. 

CONSUMPTION. 

Chapter I. Subsistence : Population, ------- 292 

" II. The Appearance of New Economic Wants, - - - 305 
" III. Consumption ; The Dynamics of Wealth ; The Reaction 

of Consumption Upon Production, - 314 



PART VI. 

SOME APPLICATIONS OF ECONOMIC PRINCIPLES. 

1. Usury Laws, 33G 

2. Industrial Co-operation, --------- 341 

3. Political Money, ----------- 351 

4. Pauperism, ------------ 359 

5. The Doctrine of the Wage Fund, ------- 364 

6. The Multiple or Tabular Standard, ------ 371 

7. Trades Unions and Strikes, -------- 375 

8. The Knights of Labor, --------- 384 

9. Attacks on the Doctrine of Rent, ------- 394 

10. Nationalization of the Land, ------- 407 

11. The Banking Functions, --------- 433, 

12. The National Banking System of the United States, - - 439 

13. Foreign Exchanges, ---------- 448 

14. Bi-Metallism, ----------- 463 

15. The Revenue of the State, -------- 475 

16. Taxation, -488 

17. "Protection" vs. Freedom of Production, ----- 505 

18. Socialism, ------------ 61X 



POLITICAL ECONOMY 



POLITICAL ECONOMY. 



PART I. 

CHARACTER AND LOGICAL METHOD OF POLITI- 
CAL ECONOMY. 

1. What Political Economy is.— Political Economy, or 
Economics, is the name of that body of knowledge which 
relates to wealth. 

Political Economy has to do with no other subject, whatso- 
ever, than wealth. Especially should the student of econo- 
mics take care not to allow any purely political, ethical or 
social considerations to influence him in his investigations. 
All that he has, as an economist, to do is to find out how 
wealth is produced, exchanged, distributed and consumed. It 
will remain for the social philosopher, the moralist, or the 
statesman, to decide how far the pursuit of wealth, according 
to the laws discovered by the economist, should be subordin- 
ated to other, let us say, higher, considerations. The more 
strictly the several branches of inquiry are kept apart, the 
better it will be for each and for all. 

The economist may also be a social philosopher, a moralist, 
or a statesman, just as the mathematician may also be a 
chemist or a mechanician ; but not, on that account, should 
the several subjects be confounded. 

2. Political Economy does not Inculcate Love of Wealth. 
— Because political economy confines itself to discovering the 
laws of wealth, it has by some been called, derisively, the 
Gospel of Mammon. In reply to this sneer it would be 
enough to say that, while wealth is not the sole interest of 



2 POLITICAL ECONOMY. 

mankind, it is yet of vast concern, of vital concern, to indi- 
viduals and to communities. As such, it deserves to be 
studied. Now, if it is to be studied at all, it will best be 
studied by itself. The easiest and surest way to increase our 
knowledge of any subject is to isolate it, and investigate it, to 
the strict exclusion, for the time, of all other subjects. 

But more may be said. Political Economy does not incul- 
cate love of wealth. It simply inquires how that passion, or 
propensity, in the degree in which it exists, does, in fact, 
influence the actions of men. Political Economy has no 
quarrel with passions or propensities which may, in a greater 
or less degree, supplant the love of wealth. It does not 
assume to sit in judgment on human conduct ; It exercises no 
choice among human motives ; It simply undertakes to follow 
causes to their effects in one single department of human 
activity, viz., the pursuit of wealth. 

3. Political Economy Tempers the Passion for Wealth.— 
So far from ministering to greed, it would be easy to prove 
that the study of Political Economy has tended, by showing 
how wealth is really best gained and kept, to banish a raven- 
ing, ferocious greed which seeks to snatch its objects of desire 
by brutal violence, at whatever cost of misery to others, and 
to replace this by an enlightened sense of self-interest, which 
seeks its objects through exchanges mutually beneficial, and 
which supports social order and international peace as the 
conditions of general well-being. 

Political Economy does not plant the love of wealth in 
human minds. It finds it there, a strong, native passion, 
which, but for enlightened views, is likely to break out into 
private rapine and public war. A little more than one hun- 
dred years ago, before Adam Smith published his great work, 
" The Wealth of Nations," it was a maxim of public policy, that 
only one party to trade could profit by a transaction, and that 
all which one party might gain, the other must lose. Out of 
this root grew wars and commercial restrictions which set 
man against man, and nation against nation, making the 
intercourse of even the most civilized states a game of deceit 
and violence. Adam Smith left the love of wealth in human 



DEFINITIONS. S 

minds, not rebuked but enlightened. Little more than a 
century has elapsed, yet mankind have made greater progress 
toward humane and mutually advantageous international 
relations in that time than during all the other centuries of 
human history. 

4. But What is Wealth ?— Economists have found much 
difficulty in defining Wealth ; and not a few writers, espe- 
cially of late, have chosen to abandon the word altogether. 

Several of these have called Political Economy the Science 
of Exchanges. But the use of this term only removes the 
essential difficulty of the subject one stage further away. 
Exchanges of what ? All human life, in society, is made up 
of exchanges, in feeling, word and act. The family relation,, 
the neighborhood, the State, the Church, imply an unceasing 
exchange of sympathies, activities and incentives, only a 
portion of which are within the view of the economist. 

If we say exchanges of wealth, we have not escaped the 
difficulty of defining Political Economy, since we have, all the 
same, to tell what wealth is. If we say exchanges of services, 
we must further explain what sort of services we mean, 
since there is an infinitude of services of man to man, 
in a great variety of relations, with which Political Economy 
can claim to have nothing to do. The services of parents to 
children, of children to parents, of children to each other, of 
friend to friend, do not form any part of the subject matter 
of Political Economy. 

If we say economic services, we have still to define the 
scope of the word economic : that is, we are back again at 
the point from which we started. 

5. The Term a Popular One. — The substitute offered for 
the term wealth, in describing the field of Political Economy, 
proving thus defective., let us see what we can do with the 
word so long in use. 

Wealth is, as Prof. Price justly observes, " the word which 
belongs to the world which Political Economy addresses." It 
would, therefore, be a matter of regret, were it to be aban- 
doned unnecessarily. When the man of business, the laboring 
man, even the man of leisure, is told that Political Economy 



4 POLITICAL ECONOMY. 

is the science of wealth, he at once feels drawn to the subject. 
No one is above, few are below, an interest in the subject. 
But the term, science of exchanges, is not especially attract- 
ive. A banker, deeming that " foreign exchanges " are meant, 
may at first think himself concerned ; but will discover his 
misapprehension when he opens the book. The great majority 
of people will doubt, on hearing the title, whether they care 
much or any thing about the science of exchanges. 

Since, then, so great popular interest attaches to the word, 
wealth, it would be a pity to lose the use of it without good 
reason. 

6. Yet Subject to Scientific Uses. — And we note that the 
conception of wealth formed by men who are not students of 
Political Economy, is clear and well-defined. It is only 
scholars, when they begin to talk and write about wealth, who 
find any difficulty in the use of the word. Stop a dozen men 
in succession, and ask them what constitutes wealth, and you 
will find an almost perfect agreement. " Every one," says 
Mr. John Stuart Mill, " has a notion sufficiently correct for 
common purposes of what is meant by wealth. The inquiries 
which relate to it are in no danger of being confounded 
with those relating to any other of the great human 
interests." 

Moreover, if we inquire what is the difficulty attributed to 
the use of the term, we find that it relates, not so much to the 
definition of wealth, as to the formation of a catalogue of the 
articles which make up the wealth of an individual or com- 
munity. 

Now, it is not important that such a catalogue should be 
formed. It would not even be fatal to a definition of wealth 
that certain objects should be found which seemed to fall 
across the line of demarkation. All definitions in Political 
Economy, as, indeed, in the natural sciences, are subject to 
this condition. Few naturalists will presume to say just where 
the vegetable kingdom ends and the animal kingdom begins. 
There are objects in nature concerning which it would puzzle 
the most learned scholar to say whether they are animal or vege- 
table. Yet we do not, on that account, hesitate to say that a 



DEFINITIONS. 5 

tree belongs to the vegetable, and an elephant to the animal 
kingdom. 

7. Relation of "Wealth to Value. — Wealth comprises all 
articles of value and nothing else. If any thing have not 
value, it does not belong to this category. It may conceiv- 
ably be better than -wealth ; but it certainly is other than 
wealth. It may become a means of acquiring wealth ; but it 
is not wealth itself. In the language of Prof. N. W. Senior, 
" the words wealth and value differ as substance and attri- 
bute. All those things, and those only, which constitute 
wealth, are valuable." 

8. But What is Value ? — Value is the power which an 
article confers upon its possessor, irrespective of legal 
authority or personal sentiments, of commanding, in exchange 
for itself, the labor, or the products of the labor, of others. 
Briefly and somewhat elliptically speaking : Value is power 
in exchange. 

We say : irrespective of legal authority. The Emperor of 
Germany can, by a word, call two millions of men from their 
homes and send them to distant fields, even to foreign lands, 
to work, to watch, to march, to fight and to die. Yet these 
services are not economic, because not voluntary. On the 
Other hand, the services of a soldier in the British army are 
economic, as they are rendered under the terms of a voluntary 
enlistment, the result of a fair and open bargain between the 
crown and the subject. 

We say also : irrespective of personal sentiments. The 
mother hangs over the sick bed, day and night, draining her 
very life blood to save her child. Her services are not eco- 
nomic, because dictated by a purely personal sentiment. On 
the other hand, the work of the hired nurse and of the feed 
physician comes fairly within the view of the economist. 

9. Transferability Essential to Value. — We note that 
exchange implies two exchangers. Value is, then, a social 
phenomenon. 

But exchange implies, also, the capability of detaching from 
the present possessor the articles to be exchanged, and making 
them over to another. 



6 POLITICAL ECONOMY. 

Do health, strength, intelligence, skill, possess this capabil- 
ity ? Are they wealth ? Have they value ? 

Not a little of the difficulty which has attended the use, in 
economics, of the word wealth, has arisen from attributing 
value to such properties or possessions as these. Prof. Alfred 
Marshall, in his admirable work, " The Economics of Indus- 
try," even includes honesty in the " personal wealth " of a 
country. 

But let us apply the test of our definition. Can these 
possessions or properties be exchanged ? Can health, strength, 
intelligence, skill, be detached and become the property of 
another ? No ; they can be taken away from one, as by sick- 
ness or death ; but they can not be made over to any one else. 
The gouty millionaire can not, with all that he has, purchase 
the robust health of the laborer by the wayside, or buy for 
his empty-headed son the learning or the trained faculties of 
the humblest scholar. Hence, all that which some economists 
have called intellectual capital, and all that which, by analogy, 
might be called physical capital, are to be excluded from the 
category of wealth. 

10. Better than Wealth, but not Wealth. — Those posses- 
sions or properties have seemed to be things so desirable in 
themselves, so much to be preferred, in any right view of 
human welfare, that excellent writers have not been able to 
bring themselves to leave them out of the field of economics. 
But Political Economy is the science, not of welfare, but of 
wealth. There may be many things which are better than 
wealth, which are yet not to be called wealth. A good name 
is rather to be chosen than riches, and loving favor than 
silver and gold ; yet a good name is not riches, and loving 
favor is neither silver nor gold. 

Here the popular understanding of the word coincides with 
the definition given for scientific purposes. Plain men do not 
speak of such qualities, or endowments, as being wealth. No 
merchant or manufacturer or laboring man would include any 
one of these items in an account of his wealth, however pre- 
cious he might esteem them. 

And it is to be noted that it does not, matter whether the 



DEFINITIONS. 7 

incapacity to detach and make over a possession to another, 
arises from the nature of things, as in the case of personal 
health and strength, skill and intelligence, or from the con- 
straints of law or public opinion. In Circassia, a beautiful 
daughter is wealth, and is popularly so accounted. No one in 
making up the list of his wealth would omit this item, any 
more than he would leave out his horses or his fields. In 
Christian countries, a daughter is not wealth, though she is 
far better than wealth. The Proclamation of Emancipation, 
in the United States and in Russia, annihilated a vast mass of 
wealth ; it created what was better than much wealth — a body 
of free men. 

But while strength, skill and intelligence can not be 
detached, and transferred, and thus can not be said to be 
wealth, the present use of them can be assigned to another, 
and hence may become the subject of exchange. The rich 
valetudinarian may command the services of the robust 
laborer, in waiting on his person ; he may hire the poor 
scholar to be tutor to his son. The usufruct of all such quali- 
ties and endowments, therefore, properly constitutes an item 
of wealth, and, by the force of contract, the capability of 
transferring this species of wealth may be extended beyond 
the present moment to considerable periods of time, as when a 
man is hired by the month or year. 

11. Relation of Wealth to Community of Goods. — But it 
may be objected that, inasmuch as exchange implies a present 
individual possessor, were community of goods or of labor to 
be universally established, there would no longer be such a 
thing as wealth, or such a department of human inquiry as 
Political Economy. 

To this it is sufficient to reply, that community of labor or 
of enjoyment is simply impossible, from the very nature of 
mankind. 

Were a hundred persons to unite in such a society, each 
would have to work by himself : the exertion must be his ; 
the pain and weariness would be all his. On the other hand, 
what he received from the common stock, would be his 
own ; the food would nourish him alone ; the clothing and the 



8 POLITICAL ECONOMY. 

food would warm only him ; none of his fellows would share 
in the pleasure or the benefit of what he consumed. 

The so-called community of labor and of goods, then, 
amounts simply to a mode of roughly apportioning exertion 
and enjoyment, on the basis of an assumed equality of abilities 
and of needs. Subject to all the injustice involved in such an 
assumption, each one of the hundred members would still part 
with his services to his fellows, and receive from them his 
remuneration, in the form of food, clothing, fuel and shelter. 

12. Relation of Value to Gratuity. — It will have been 
gathered from what has been said respecting value, that wealth 
and well-being are not synonymous. Much which is essential 
to the latter is no element of the former. Wealth may be 
increased at the expense of well-being, as in the case of the 
reduction of free laborers to the grade of chattel slavery. 
Wealth may be diminished temporarily by causes which min- 
ister to the advancement of the community and the State, as 
in the case of inventions which throw out of use large amounts 
of material and apparatus, or of ameliorating changes in 
nature which allow costly contrivances to be dispensed with. 

" If," wrote Prof. Senior, " the climate of England could 
suddenly be changed to that of Bogota, and the warmth which 
we extract imperfectly and expensively from fuel were sup- 
plied by the sun, fuel would cease to be useful, except as one 
of the productive instruments employed by art ; we should 
want no more grates or chimney-pieces in our sitting-rooms ; 
what had previously been a considerable amount of property, 
in the fixtures of houses, in stock in trade and materials, would 
become valueless ; coals would sink in price ; the most expen- 
sive mines would be abandoned ; those which were retained 
would command smaller rents." 

13. Continuous Displacement of Value by Gratuity. — 
We are now called further to notice that there is a constant 
tendency to this diminution of the sum of wealth, and even to 
the annihilation of individual items, from age to age. So 
rapid and persistent is that tendency that, but for the increase 
of population, and the multiplication and diversification of 
human desires, due to increasing civilization and refinement, 



DEFINITIONS. 9 

the subject matter with which Political Economy has to deal 
would be continually diminishing. 

How small the sum of wealth which would suffice for a 
community, in our stage of knowledge and skill, which should 
aspire to live only as well as a tribe of savages ! The boats, 
the nets, the huts, the clothing and the domestic utensils of a 
primitive community represent an incredible amount of exer- 
tion and sacrifice ; possess a vast amount of purchasing power. 
A like outfit would require but an insignificant part of the 
labor power of a modern community, and would have but 
little purchasing power. 

The tendency which has been noted arises out of the prog- 
ress of mankind in the chemical and mechanic arts, by which 
operations formerly difficult are made easy ; by which 
materials naturally scarce are made plentiful ; by which 
human necessities once urgently felt are wholly obviated, and, 
finally, by which things once costing labor are made to pro- 
duce themselves spontaneously. 

14. Growth of Human Wants. — In fact, however, while, 
in any community, this displacement of value by gratuity is 
continually in progress, the increase of population and the 
multiplication and diversification of human wants may be 
operating as steadily and strongly in the other direction. The 
labor that is made free by discoveries and inventions is applied 
to overcome the difficulties which withstand the gratification 
of newly-felt desires. The hut is pulled down to make room 
for the cottage ; the cottage gives way to the mansion ; the 
mansion to the palace. The rude covering of skins is replaced 
by the comely garment of woven stuffs ; and these, in the 
progress of luxury, by the most splendid fabrics of human 
skill. In a thousand forms wealth is created by the whole 
energy of the community, quickened by a zeal greater than 
that which animated the exertions of their rude forefathers to 
obtain a scanty and squalid subsistence. 

15. Distinction between "Wealth and Property. — A fur- 
ther distinction is that between wealth and property. The 
neglect of this has caused great confusion, especially in dis- 
cussions of the principles and methods of taxation. 



io POLITICAL ECONOMY. 

Mr. J. S. Mill affords an example of the confusion of these 
terms when he says, respecting a mortgage on a landed estate, 
" this is wealth to the person to whom it brings in a revenue, 
and who could, perhaps, sell it in the market for the full 
amount of the debt. But it is not wealth to the country ; if 
the engagement were annulled, the country would be neither 
poorer nor richer." 

A more accurate statement of the case would be this : The 
landed estate is wealth, that is, possesses value ; that is, con- 
fers upon its possessor the power of commanding, in 
exchange for itself, the labor, or the products of the labor, of 
others. The mortgage is property, or a right to wealth ; in 
this case, a right to an undivided portion of the landed 
estate. The amount of the property of the owner of the estate 
is the value of the estate less the mortgage. There is but 
one body of wealth ; there are two properties, that of the 
owner, and that of the mortgagee. The wealth of the commu- 
nity is no greater and no less, whether the ownership of the 
estate be entire, or divided into two or half a dozen properties. 

Indeed, we might say that " property " is not a word with 
which the political economist has any thing to do. It is legal, 
not economic, in its significance. 

" The wealth," says Prof. Senior, " which consists merely 
of a right or credit, on the part of A., with a corresponding 
duty or debt on the part of B., is not considered by the Polit- 
ical Economist. He deals with the things which are the sub- 
jects of the right, or the credit, not with the claims or liabili- 
ties which may affect them. In fact, the credit amounts merely 
to this : that B. has in his hands a part of the property of A." 

16. The Premises of Political Economy. — What are the 
proper premises of Political Economy ? that is, what facts 
and principles should the economist take to reason from ? 
Are they many or few ? Shall the economist take into 
account all the facts, mental or physical, which influence the 
phenomena of wealth ; or shall he confine himself to certain 
principal facts ? 

Shall we take man, for the purpose of economic reasoning, 
precisely as he is found to be, with all his appetencies and 



THE TWO SCHOOLS. II 

characteristics, so far as they affect the power and the dispo- 
sition to labor, or so far as they increase or impair the ability 
of individuals to secure their share in the distribution of the 
product of industry ? or shall we create, for the purposes of our 
reasoning, an economic man, assumed to be impelled by certain 
motives in respect to wealth, from whose actions men in gen- 
eral, knowing themselves to be more or less fully controlled 
by similar motives, may derive instruction ? 

Instead of seeking to extend our knowledge of the actual 
conditions under which wealth is produced by man, shall we 
content ourselves with certain leading conditions, such as that 
food is produced without human labor only in small quantities 
and very precariously ; that the soils of every country vary 
widely in fertility ; and that of no soil can the produce be 
increased indefinitely without a more than proportional expen- 
diture of labor and capital ? 

Shall we take account of the various endowments, in the 
way of soil and climate, mineral resources and water power, of 
different countries? Shall we study their institutions and the 
predominant traits of character manifested by their people, so 
far as these appear to influence their actions in respect to 
wealth ? Or shall we, on the other hand, disregard all that 
makes one nation to differ from another, caring to learn 
nothing of any which would not hold good of all. 

Upon the answer to these questions depends the character 
and logical method of Political Economy. Upon that answer 
depends also much of the usefulness of this department of 
inquiry and the interest it may be expected to arouse in the 
public mind. 

17. Two Schools of Political Economy. — The differences 
of opinion which exist regarding the proper extent of the 
premises of Political Economy have given rise to two schools 
which are commonly called the English and the German school. 

The economists of the former school insist that the proper 
premises of pure Political Economy consist of a few certain 
facts of human nature, of human society, and of the physical 
constitution of the earth. That these, not more than five or six 
in number, constitute all the premises proper to the inquiry. 



12 POLITICAL ECONOMY. 

That the scope of economic reasoning can not he extended 
beyond these without destroying the purity and simplicity of 
the science, and introducing error and confusion. 

The economists of the latter school hold that it is the prov- 
ince of Political Economy to explain the phenomena of 
wealth. That, in order to do this, the economist must inquire 
how men do, in fact, behave in regard to wealth, constituted 
as they are, and under the conditions and circumstances in 
which they are placed. 

In this view, nothing that importantly influences the pro- 
duction and distribution of wealth can be neglected by the 
economist. All human history becomes his domain. The other 
sciences, alike the physical and the moral, become tributary to 
the science he cultivates. 

With its premises thus enlarged, Political Economy ceases 
to be something which one man of superior intellect could, 
with a definite exertion of his faculties, work completely out 
at a sitting, as Beckf ord wrote " Vathek " ; and that too with- 
out having visited any community beyond the one in which he 
was born, or knowing a page of history. Political Economy, 
as thus comprehended, becomes a work to which many men 
and successive ages must contribute ; the material of which is 
accumulated in human experience, and is thus continually on 
the increase. It becomes a work which never is, but is always 
to be done, growing with the growing knowledge of the race. 

18. Prof. Cairnes' Statement.— It has been said that the 
two schools of Political Economy are known as the English 
and the German school. The terms are not fortunate, inasmuch 
as some of the economists who have labored most fully in the 
spirit of the so-called German school, have been natives of the 
British Isles. The best statement known to me of the true 
scope of economic inquiry is that given by Prof. Cairnes, from 
whose admirable lectures* I abridge the following paragraphs, 
preserving the author's phraseology : 

The desires, passions and propensities which influence man- 

* " On the Character and Logical Method of Political Economy," first 
published in 1857 ; reprinted, revised and enlarged in 1875, just before 
the lamented author's death. 



THE TWO SCHOOLS. 1 3 

kind in the pursuit of wealth are almost infinite. Yet among 
these are some principles of so marked and paramount a char- 
acter as both to admit of being ascertained, and when ascer- 
tained, to afford the data for determining the most important 
laws of the production and distribution of wealth. To possess 
himself of these is the first business of the political economist. 
He has then to take account of some leading physiological 
facts connected with human nature ; and, lastly, to ascertain 
the principal physical characteristics of those natural agents of 
production on which human industry is exercised. 

But it must not be thought that when these cardinal facts 
have been ascertained, and their consequences duly developed, 
the labors of the political economist are at an end. Many 
subordinate influences will intervene to disturb, and occasion- 
ally to reverse, the operation of the more powerful principles, 
and thus to modify the resulting phenomena. 

19. Subordinate Causes in Economies. — The next step, 
therefore, in his investigations will be to endeavor to ascertain 
the character of those subordinate causes, whether mental or 
physical, political or social, which influence human conduct in 
the pursuit of wealth. These, when he has found them, and 
is enabled to appreciate them with sufficient accuracy, he will 
incorporate among the premises of the science. 

Thus, the political and social institutions of a country, in 
particular, the laws affecting the tenure of land, will be 
included among such subordinate agencies. It will be for the 
political economist to show in what way causes of this kind 
modify the operation of more fundamental principles. Again, 
any great discovery in the arts of production, such, e. g., as 
the steam engine, will be a new fact for the consideration of 
the political economist. It will be like the discovery of a new 
planet, the attraction of which, operating on all the heavenly 
bodies within the sphere of its influence, will cause them more 
or less to deviate from the path which had been previously 
calculated for them. 

In the same way, also, those motives and principles of action 
which may be developed in the progress of society, so far as 
they may be found to affect the phenomena of wealth, will 



14 POLITICAL ECONOMY. 

also be taken account of by the political economist. He will 
consider, e. g., the influence of custom in modifying human 
conduct in the pursuit of wealth. He will consider how, as 
civilization advances, the estimation of the future in relation 
to the present is enhanced, and the desire for immediate enjoy- 
ment is controlled by the increasing efficacy of prudential 
restraint. He will also observe how ideas of decency, comfort 
and luxury are developed as society progresses, modifying the 
natural force of the principle of population, influencing the 
mode of expenditure of different classes, and affecting thereby 
the distribution of industrial products. Even moral and 
religious considerations are to be taken account of by the 
economist precisely in so far as they are found, in fact, to affect 
the conduct of men in the pujsuit of wealth. 

20. Remarks on Prof. Cairnes' Statement.— Nothing could 
be added to this statement of the logical method of Political 
Economy, as it is pursued by those who hold that it is the 
province of the science to explain the phenomena of wealth ; 
and that, to this end, all causes which, whether primarily, or 
principally social, ethical, physical or physiological, do, in fact, 
enter to affect the actions of men respecting wealth, should be 
identified and determined, so far as may be, both in their direc- 
tion and in the degree of their influence. 

In this view the economist who omits any cause, structural 
or dynamic, physical or moral, which affects the production, 
exchange, distribution or consumption of wealth, must justify 
himself, not by the plea that such a cause has no relevancy to 
his investigation, but by some plea which would excuse an 
admittedly less than complete treatment of the subject, e. g. 
the lack of information, the limitations of the human faculties, 
or the need, for popular instruction, of very brief and very 
general statements of principle. 

21. Mr. Mill on the Economic Man. — On the other hand, 
perhaps the best statement of the view taken by the econo- 
mists of the so-called English school, as to the proper premises 
of Political Economy, is that given by Mr. J. S. Mill, in his 
work published in 1844. 

" Political Economy," says Mr. Mill, " is concerned with 



THE TWO SCHOOLS. *5 

man solely as a being who desires to possess wealth and who 
is capable of judging of the comparative efficacy of means to 
that end. * * * It makes entire abstraction of every other 
human passion or motive, except those which may be regarded 
as perpetually antagonizing principles to the desire of wealth, 
namely, aversion to labor and desire of the present enjoyment 
of costly indulgences. These it takes, to a certain extent,, 
into its calculations, because these do not merely, like other 
desires, occasionally conflict with the pursuit of wealth, but 
accompany it always, as a drag or impediment, and are, there- 
fore, inseparably mixed up in the consideration of it. Politi- 
cal Economy considers mankind as occupied solely in acquir- 
ing and consuming wealth." * 

We have here all the elements of the economic man. He is 
taken as a being perfectly capable of judging of the compara- 
tive efficacy of means to the end of wealth. That is, he will 
never fail, whoever he may be, or wherever he may live, 
whether a capitalist or a laborer, rich or poor, taught or 
untaught, to know exactly what course will secure his highest 
economic interest, that is, bring him the largest amount of 
wealth. 

Moreover, that end of wealth he never fails to desire, with 
a steady, uniform, constant passion. Of every other human 
passion or motive, Political Economy " makes entire abstrac- 
tion." Love of country, love of honor, love of friends, love of 
learning, love of art, pity, shame, religion, charity, will never, 
so far as Political Economy cares to take account, withstand 
the effort of the economic man to amass wealth. 

There are, however, two human passions and motives, of 
which Political Economy takes account, as " perpetually antag- 
onizing principles to the desire of wealth," namely, " aversion 
to labor and desire of the present enjoyment of costly indul- 
gences," that is, indolence and gluttony. 

As by this view of Political Economy all men are taken as 
equally absorbed in the passion for wealth, so all men are 

* In his great work, subsequently published, Mr. Mill did not confine 
himself to the method here described ; but professedly dealt with Polit- 
ical Economy in many of its " Applications to Social Philosophy." 



1 6 POLITICAL ECONOMY. 

taken as equally lazy and self-indulgent. The South Sea 
Islander and the large-brained Em-opean are equally averse to 
exertion ; equally subject to the impulses of immediate 
appetite. 

22. Bicardo the Master of the English School.— Such 
are the features of the economic man, as delineated by Mr. 
Mill. Not a few treatises have been written mainly accord- 
ing to this method. The ablest body of doctrine ever com- 
posed from this point of view is that of David Ricardo. Hence 
this school of Political Economy may not inaptly be called 
the Ricardian. Mr. Ricardo, indeed, modified those assump- 
tions so far as to recognize the difference in economic quality 
existing between men of different countries, not only between 
the East Indian and the Englishman, but also between the 
Englishman and the Portuguese. Within the same country, 
however, he recognized no such differences ; but held rigor- 
ously to the few and simple postulates which have been 
stated. The acuteness of his intellect, the tenacity of his 
logical grasp, make him easily the master of all the econo- 
mists of this school. 

23. Relations of the Two Schools.— It need not be a 
matter of surprise that so wide a difference of opinion as to 
the proper scope of economic inquiry should have led to 
much passionate controversy. The economists of the so-called 
German school have been disposed to deny, not only the uni- 
versality of principles deduced from assumptions so arbitrary 
and falling so far short of the real facts of life and society, 
but also the significance, for any purpose whatever, of conclu- 
sions thus obtained. The economists of the so-called English, 
or Ricardian school, have treated the method of their oppo- 
nents as unscientific, giving scope to charlatanry, and at the 
best tending to mere sentimentality. 

The mutual contempt entertained by the two schools is not 
justified by a large view of the progress of economics in the 
past, or by a consideration of the history of other social sci- 
ences. Political Economy should begin with the Ricardian 
method. A few simple assumptions being made, the pro- 
cesses of the production, exchange and distribution of wealth 



IS IT A SCIENCE? 1 7 

should be traced out and be brought together into a complete 
system, which may be called pure Political Economy, or arbi- 
trary Political Economy, or, a priori Political Economy, or 
by the name of its greatest teacher, Ricardian Political 
Economy. Such a scheme should constitute the skeleton of 
all economic reasoning ; but upon this ghastly frame-work 
should be imposed the flesh and blood of an actual, vital 
Political Economy, which takes account of men and societies 
as they are, with all their sympathies, apathies, and antipa- 
thies ; with every organ developed, as in life ; every nerve of 
motion or of sensibility in full play. 

24. The True Labor of Philosophy. — On this subject 
what could be more pregnant with meaning than the aphorism 
of Bacon, " Those who have treated of the sciences have been 
either empirics or dogmatical. 

" The former, like ants, only heap up and use their store ; 
the latter, like spiders, spin out their own web. 

" The bee, as a mean between both, extracts matter from 
the flowers of the garden and the field ; but works and fash- 
ions it by its own efforts. 

" The true labor of philosophy resembles hers ; for it neither 
relies entirely or principally on the powers of the mind, nor 
yet lays up in the memory the matter afforded by the experi- 
ments of natural history and mechanics, in its raw state, but 
changes and works it in the understanding." 

25. Is Political Economy indeed a Science ? — The answer 
to this question depends rather upon the definition imposed 
on the word science, than upon the view we take of Political 
Economy itself. If we give the word no wider extension than 
Dr. Whewell gave it, when he spoke of " those bodies of 
knowledge which we call sciences," Political Economy indu- 
bitably ranks as a science. It forms a body of knowledge, con- 
stantly growing, it is true, from the outside, and undergoing 
not a little change from time to time within, yet still embrac- 
ing, in the present, a vast collection of related facts, with the 
reason of their succession, one to another, more or less clearly 
seen, and allowing many practical rules and precepts of great 
importance in determining human conduct to be deduced with 



1 8 POLITICAL ECONOMY. 

all needed assurance. In this sense, then, Political Economy 
is a science. 

Whether it be a science in the highest sense given that word, 
may be disputed. M. Comte, the great positivist philoso- 
pher, denied the claim of Political Economy to this title. In 
his view, it is an attribute of a true social science that it 
results in establishing a rational filiation between events, so as 
to allow of systematic prevision respecting their occurrence 
in a certain succession. Prediction — forecast of the future 
— is, according to M. Comte, the fruit of all true science. 
Of this, he asserts, political economy has not shown itself 
capable. 

Prof. Cairnes rejoins that the economic prevision is a pre- 
vision not of events, but of tendencies. Admitting the inca- 
pacity of forecasting events, Prof. Cairnes urges that " it 
argues no imperfection in economic science. The imperfection 
is not here, but in those other cognate sciences, to which 
belongs the determination of the non-economic quantities in 
the problem, etc. * * Meanwhile it is no slight gain, in 
speculating on the future of society, to have it in our power 
to determine the direction of an order of tendencies exercising 
so wide, constant and potent an influence on the course of 
human development, as the conditions of wealth. * * * 
So much for the highest form of scientific fruit, ' forecast of 
the future.' The principle, however, of establishing a filiation 
in events may take the more modest form of explaining the 
past. * * That political economy, assuming that it fulfills 
its limited purpose of unfolding the natural laws of wealth, is 
capable of throwing light on the evolutions of history, will 
scarcely be denied." 

26. The Practical Importance of Political Economy. — 
We can not stay to discuss the question. Whether Political 
Economy be or be not a science in the high sense attributed to 
that word by M. Comte, it assui'edly is, as a branch of social 
inquiry, worthy the earnest attention of eveiy publicist and 
every citizen. It deals with some of the most important sub- 
jects which concern society. Whether the degree of assur- 
ance that may be attained in the study of these questions be 



A SCIENCE OR AN ART. 19 

higher or be lower, the questions can not but be more justly 
decided by reason of such study. 

If Political Economy have not yet reached the standing of 
a true science, in the high sense in which that word is used by 
M. Comte ; if political economists are still at disagreement 
on many points of theoretical or practical importance, it can 
not be denied that the investigation of the conditions of wealth 
by Adam Smith and his successors has already resulted in the 
removal of monstrous delusions which a century ago pro- 
foundly affected the legislation of every civilized country, to 
the inexpressible injury of the commonwealth of nations. The 
first fruits of Political Economy have been worth a million 
times the intellectual effort that has been bestowed upon the 
subject. 

27. Distinction between a Science and an Art. — Before 
proceeding to inquire whether Political Economy should be 
dealt with as a science or as an art, it seems desirable strongly 
to emphasize the distinction between a science and an art. 
This is the more needed because of the strangely persistent 
habit of economic writers in confusing these two things, which 
should be kept clearly distinct. 

A science, whether the science of mathematics, or physics, 
or mechanics, or chemistry, or geology, or physiology, or 
economics, deals only with the relations of cause and effect 
within its own field. It assumes nothing to be a good and noth- 
ing to be an evil. It does not start with the notion that some- 
thing is desirable or undesirable ; nor does it arrive at any 
such conclusion as its result. It has no business to offer pre- 
cepts or prescriptions. Its sole single concern is to trace 
effects back to their causes ; to project causes forward to their 
effects. 

An art, on the other hand, starts with the assumption that a 
certain thing is desirable or that a certain other thing is unde- 
sirable ; that something is a good or that something is an evil. 
The object it seeks is to ascertain how the good may be 
attained, or the evil avoided. In pursuing this inquiry, it 
makes use of the principles, or laws, governing the relations 
of cause and effect, which have been ascertained in the cultiva- 



20 POLITICAL ECONOMY. 

tion of any and all sciences that have in any way to do with its 
own subject matter. As a result, it issues with certain precepts 
and prescriptions for the guidance and assistance of those who 
would gain the good or avoid the evil which that particular 
art has in contemplation, whether it be the art of navigation, 
or of cookery, of painting, of gunnery, of architecture, of min- 
ing, or of weaving. 

28. The Distinction Illustrated. — This distinction between 
a science and an art ought to be sufficiently clear ; but the 
inveterate disposition of economic writers, which has been 
referred to, will perhaps justify an illustration which I shall 
make familiar, even at the risk of appearing coarse. 

Suppose I am in my laboratory and a man enters whc 
says that he desires to consult me, as a professor of chemistry 
as to whether he had better swallow the contents of a vial which 
he holds in his hand. I reply to him : " Sir, I have no advice, 
as a professor of chemistry, to offer you as to what you shall 
swallow or refrain from swallowing. I perceive that the 
liquid contained in your vial is prussic acid. I will cheerfully 
state to you the action of prussic acid on any substance about 
which you may choose to inquire ; but probably you had bet- 
ter, for your apparent purpose, go to Prof. S., the physiolo- 
gist, who can more fully and readily than myself explain the 
precise action of prussic acid when taken into the stomach of 
a living being." 

The inquirer now goes to Prof. S., and says that he desires 
to consult him, as a professor of physiology, as to whether he 
had better swallow the liquid which the chemist has told him 
is undilute prussic acid. Prof. S. replies : " Sir, should you 
consult me as a fellow being, I would not stand on ceremony, 
but frankly advise you to empty the contents of your vial 
into the sink. But if you insist on consulting me as a pro- 
fessor of physiology, I must reply that I have no advice to 
give. Physiology, sir, is a science ; as such, it has nothing to 
do with precepts or prescriptions, but only with the relations of 
cause and effect within the field of animal life. As a student 
of that science, I inform you that, if you swallow the liquid, 
you will experience such and such sensations, and, at about 



SCIENCE OR ART. 21 

such a time, you will be dead. Since you still insist upon hav- 
ing advice as to whether you had better do this or not, I refer 
you to my neighbor, Dr. G., who is the professor, not of a 
science, but of an art. As such, it is his business to give 
advice regarding conduct. As such, he has a right to enter- 
tain the notion that certain things are good, and certain things 
evil ; that the means calculated (as shown by the appropriate 
science or sciences) to bring about the good, are desirable ; 
that the courses which (as shown by the appropriate science 
or sciences) lead to the evil, are undesirable. He would not 
be a physician unless he held that pain and death were evil ; 
life and the absence of pain, good. What he is a physician 
for is to help his patients to avoid the evil and obtain the good. 
In doing this he will naturally seek to apply the largest and 
latest results of the science of physiology to the art of healing." 

29. Distinction between Political Economy as a Science 
and as an Art. — " If," says Prof. Senior, "Political Economy 
is to be treated as a science, it may be defined as the science 
which states the laws regulating the production and distri- 
bution of wealth, so far as they depend on the action of the 
human mind. If it be treated as an art, it may be defined as 
the art which points out the institutions and habits most con- 
ducive to the production and accumulation of wealth ; or, if 
the teacher ventures to take a wider view, as the art which 
points out the institutions and habits most conducive to that 
production, accumulation and distribution of wealth which is 
most favorable to the happiness of mankind." 

30. Prof. Senior goes on to remark that, in the eighteenth 
century, political economy was treated as an art, a branch 
of statesmanship. Sir James Steuart so treated it. The 
French Physiocrats so regarded it. Even with Adam Smith, 
" the scientific portion of his work is merely an introduction 
to that which is practical." 

Oddly enough, the statesman Turgot must be made an 

exception to the remark respecting the French Physiocrats. 

" It is remarkable," says Prof. Senior, " that the only man 

among the disciples of Quesnay* who was actually practicing 

*See paragraph 48. 



22 POLITICAL ECONOMY. 

political economy as an art, is the only one who treated its 
principles as a science. His ' Reflexions sur la formation et 
la distribution des richesses,' published in 1774, is a purely 
scientific treatise. It contains not a word of precept, and 
might have been written by an ascetic, who believed wealth 
to be an evil." 

Prof. Senior continues : " The English writers who have 
succeeded Adam Smith have generally set out by defining 
political economy as a science, and proceeded to treat it as 
an art. Mr. Ricardo is, however, an exception. His great 
work is little less scientific than that of Turgot. His absti- 
nence from precept, and even from illustrations drawn from 
real life, is the more remarkable, as the subject of his treatise 
is ' Distribution,' the most practical branch of political econ- 
omy, and ' Taxation,' the most practical branch of Distribu- 
tion. The modern economists of France, Germany, Spain, 
Italy and America, so far as I am acquainted with their works, 
all treat political economy as an art." 

31. We shall deal "with Political Economy as a Science. 
— The inveterate disposition, which Prof. Senior thus notes, 
to abandon the investigation of principles for the formulation 
of precepts, has doubtless retarded greatly the progress of 
political economy. It can not be too strongly insisted on, 
that the economist, as such, has nothing to do with the 
questions, what men had better do ; how nations should be 
governed ; or what regulations should be made for their 
mutual intercourse. His business simply is to trace economic 
effects to their causes, leaving it to the philosopher of eveiy- 
day life, to the moralist or the statesman, to teach how men 
and nations should act in view of the principles so estab- 
lished. The political economist,* for example, has no more 

* A distinguished English Economist, quoting this remark, in the 
Contemporary Review, asks with some asperity, " What, then, should the 
political economist preach ? " I answer, nothing. His business is to 
teach and not to preach. He acquits himself of his duty when he shows 
the relations of cause and effect within the field of industry, leaving it to 
statesmen, moralists and men of affairs to act for themselves, or to preach 
to others, with reference to what the political economist teaches. 



IS POLITICAL ECONOMY NATIONAL? 23 

call to preach free trade, as the policy of nations, than the 
physiologist to advocate monogamy as a legal institution. 

Throughout this work until we reach Part VI, which will 
he in terms devoted to Some Applications of Economic Prin- 
ciples, the effort will be made to treat political economy 
strictly as a science. If at any point the writer lapses into 
•expressions only suitable to the teacher of an art, it will be 
partly because of that strong predisposition which has been 
noted in almost all writers on this subject, and partly to the 
influence of example. 

32. Is There a National Political Economy ? — This is a 
question which has been much debated. The so-called pro- 
tectionists have favored the view that each country has a 
political economy of its own. One writer of our own country 
has entitled his work " American Political Economy." 

The controversy over this question arises out of the confu- 
sion produced, first, by the failure to distinguish between the 
science of political economy and the use of political economy 
in the art of statesmanship ; secondly, by the different views 
taken of the proper premises of the science of political 
economy by the two schools (Par. 11) before referred to. 

Those who say that there is an American Political Econo- 
my, for example, mean that the precepts derived from politi- 
cal economy, whether addressed to the legislator, or to the 
body of the people, should not be applied to America without 
reference to the peculiar constitution, conditions and needs 
of America. But a science has nothing to do with precepts 
or prescriptions. Rules of conduct belong to an art. 

33. National and Race Characteristics. — Moreover, the 
notion that there is a political economy for each race of men, 
and even for each nation, has been fostered by the arbitrary 
character of the assumptions of what we have called the 
Ricardian school, and by the refusal to pay a reasonable 
regard to some of the most characteristic features of human 
nature and some of the most prominent facts of industrial 
society, embracing institutions and laws which vitally affect 
the production and distribution of wealth. 

Thus, the d priori economist, in discussing the question 



24 POLITICAL ECONOMY. 

of wages, assumes, for the purposes of his reasoning, a body 
of laborers who are wholly intent on getting the largest 
remuneration ; who will, for any advantage, however slight, 
change their occupation, and with equal readiness their place 
of abode, at least within their own country ; who, moreover, 
are so intelligent and well-informed that no preference, 
economically, can exist on behalf of any other occupation or 
place of abode, without their knowing it, and, of course, 
acting at once upon it. The economist having created such 
a race of beings, whose likeness is found nowhere upon earth, 
proceeds to point out, it may be with great acuteness and 
accuracy, what the individual members thereof would do in 
various supposed cases, under the impulse of this or that 
economic force. His conclusions are put forth as " laws " of 
political economy. 

Is it strange that an intelligent East Indian, reading these 
conclusions, should say, if this is political economy, it must be 
European political economy, and there should be a separate 
political economy for the East, since here, over vast regions, 
social and religious feelings absolutely prohibit multitudes of 
workmen from changing their occupation, for any reason ; 
while the almost uniform penury of the laboring class, their 
ignorance, superstition, and fear of change, combine to render 
movement from place to place tardy and difficult, if not, as in 
most cases, practically impossible ? 

34. Relation of Political Economy to other Sciences. — 
Political Economy does not ascertain for itself a single one of 
the facts which form the premises of the economist. These 
are all derived from other sciences as data, *. e., things given. 
From the physiologist, for instance, is obtained the fact of 
man's need of food to sustain life, from which is deduced the 
economic doctrine of minimum wages. From the physiologist, 
again, is obtained the fact of a strong disposition, arising from 
the sexual passion, to carry population beyond the limits of 
decent or comfortable subsistence, from which is deduced the 
much-abused doctrine known as Malthusianism. From the 
agricultural chemist is obtained the fact that, beyond a certain 
point, the application of capital and labor to land yields a, 



RELATIONS TO OTHER SCIENCES. 25 

continually diminishing return, from which is deduced the 
doctrine of Rent. None of these facts does the economist 
ascertain for himself. He takes them, as the realized results 
of other sciences, and makes them the premises, the starting 
point, of his own. 

Even the fact of the indisposition of men to strenuous exer- 
tion, from which is deduced the principle that they will, so 
far as they are intelligent and are left free to act, always 
buy in the cheapest market, is not found by the economist. It 
is furnished, ready to his hand, by the moral philosopher. 
The economist takes from all sciences, by turns, all facts which 
bear upon the one subject, wealth ; considers them only so far 
as they bear thereon ; and puts them together and builds them 
up into a " body of knowledge " which he calls the Science of 
Wealth, or Political Economy. Even in the field of prices and 
wages, the distinction should always be observed between the 
economic statistician, who finds the facts, and the economist, 
who puts the facts into their place in the industrial system. 

85. Political Economy and Natural Theology.— Prof. 
Cliffe Leslie has shown the powerful influence exerted upon 
the economic views of Adam Smith, who, as Professor of Moral 
Philosophy in the University of Glasgow, had occasion to 
teach both Political Economy and Natural Theology, by the 
assumption of a beneficent natural order of society, to the 
disturbance of which by human institutions are due all the 
economic evils that afflict mankind. To this order-of-nature 
it should, according to Dr. Smith, be the unceasing effort of 
mankind to return ; and the political economist will fully dis- 
charge himself of his mission as an investigator and teacher 
when he points out the path by which mankind may make 
their way back to that state in which all things economic will 
work together for the good of the race. 

Now, this subjection of political economy to the interests of 
natural theology is wrong. I do not say that good natural 
theology will make bad political economy. I content myself 
with asserting that political economy has just as much right 
to be independent of natural theology, as have astronomy and 
geology. There was a time when the students of those 



26 POLITICAL ECONOMY. 

sciences were deemed to be bound to restrain themselves within 
the supposed requirements not only of natural theology, but 
also of revealed religion. We know how mischievous were 
the consequences of that subjection. 

Political economy owes nothing to natural theology. The 
economist is under no obligation to any assumptions derived 
from that source. He has no more right to start with the 
theory of an order of nature which is purely beneficent, than 
he would have to start with the opposite theory of an order 
of nature wholly maleficent. As economist, he has no mission 
to " vindicate the ways of God to man." He is to investigate 
the laws of wealth. That duty he will best discharge by 
reasoning as justly as his mental powers enable him to do, 
from economic premises which have been established by ade- 
quate induction, and from such only. 

36. Political Economy and Political Equity.— The boun- 
dary line between ethical and economic inquiry is perfectly clear, 
if one will but regard it. Great confusion has been engen- 
dered by writers in economics wandering off into discussions of 
political equity. The economist, as such, has nothing to do 
with the question whether existing institutions, or laws, or 
customs, are right or wrong : why right, or how far right : 
why wrong, or how far wrong. His only concern with them 
is to ascertain how they do, in fact, affect the production and 
distribution of wealth. 

It is true that if the sense of injustice be awakened in the 
mass of the people, or in any considerable class in the com- 
munity, industry, frugality, and sobriety are likely to be in a 
greater or less degree impaired, and thus the production and 
distribution of wealth will be affected. But it is wholly because 
of the effect last indicated, and not at all because of its ethical 
character, that any social arrangement or political institution 
comes within the consideration of the economist. 

Indeed there is reason to believe that such arrangements 
and institutions do not necessarily produce economic evils in 
proportion to the degree in which they violate political equity. 
A custom or law might conceivably be inequitable in the 
degree to be flagrantly iniquitous, yet exert only a slight 



RELATIONS TO OTHER SCIENCES. 27 

influence upon the production or distribution of wealth. 
Another, presenting so great an array of reasons in its favor 
that many ethical writers would strongly approve it, might, 
by crossing popular prejudices, or through some wholly adven- 
titious feature of its own, become a mighty economic force 
for mischief. Indeed, it is not at all because a social arrange' 
ment or political institution is wrong, but because people think 
it wrong, that it does harm in the domain of wealth. The 
system of land tenure against which the peasantry of Ireland 
are so largely in revolt does an amount of mischief which is 
wholly independent of the consideration whether the Irish 
people or the English Parliament be at fault in the matter. 

37. Respect the Limits of Economic Inquiry. — Hence we 
say that the limits of strictly economic inquiry should be 
scrupulously respected. The writer on ethics who deems the 
greatest good of the greatest number the ultimate rule of 
right, may make excursions into economics, in order to judge 
of the moral quality of an act, or a system, by its effects on 
the production and distribution of wealth ; but the economist, 
on his part, has no occasion to cross the boundary line. The 
French writers, who have, in general, been singularly just in 
their apprehension of the character and logical method of 
political economy, have, more than all others, erred on this 
side. Many of them write throughout with a side glance at 
the existing social system. They profess to be intent on the 
solution of economic problems, while directing their efforts 
toward the vindication of political arrangements. The writ- 
ings of the admirable Frederic Bastiat are deeply infected 
with this error. He strives incessantly to prove that the insti- 
tution of property is just ; whereas the only concern which, 
as an economist, he has with that institution, is to inquire how 
it influences the action of mankind in respect to wealth. 

38. Sentiment and Political Economy. — Holding rigidly 
to the same view of the nature and scope of economic inquiry, 
we see that those who allow their opinions to be in any degree 
shaped by what is called sentiment, are equally wrong with 
those who sneer at any recognition of sentiment by the econ- 
omist. The economist's own sentiments should be put com- 



28 POLITICAL ECONOMY. 

pletely out of sight ; he has only to do with the sentiments 
of others, and with these only so far as they affect the actions 
of men in respect to wealth. 

We shall have occasion to observe that feelings of justice, 
of compassion, of respect, of kindly regard, may greatly influ- 
ence the rents paid in any country, by tenants to landlords, or 
the wages paid by employers to workingmen or working- 
women. So far as such sentiments produce these effects, they 
require to be recognized as economic forces. 

39. Belation of Political Economy to Sociology. — M. 
Comte, whom we have already quoted, as denying to political 
economy the character of a true science, because its history 
did not, as he esteemed it, bear the tests of continuity and 
fecundity, also held that the phenomena of wealth should not, 
and could not advantageously, be considered apart from the 
facts of the intellectual, moral and political order with which 
they are closely interwoven. Society, he held, must be con- 
sidered in the totality of its elements. All isolated theory of 
a particular aspect of social life, such as wealth, or of a single 
order of relations, e. g., the economic, he regarded as essen- 
tially vicious. The laws and conditions of wealth, in the view 
of this writer, are a single thread in a closely knit web of 
social interests and concerns, from which no one can be dis- 
connected, to be contemplated by itself alone. 

To this opinion, Mr. J. S. Mill has made what seems to be 
a conclusive reply : 

" Notwithstanding," he says, " the universal consensus of the 
social phenomena, whereby nothing which takes place in any 
part of the operations of society, is without its share of influ- 
ence on every other part, and notwithstanding the paramount 
ascendency which the general state of civilization and social 
progress in any given society must hence exercise over all the 
partial and subordinate phenomena, it is not the less true that 
different species of social facts are, in the main, dependent, 
immediately, and in the first resort, on different kinds of 
causes, and, therefore, not only may with advantage, but must 
be studied apart, just as, in the natural body, we study separ- 
ately the physiology and pathology of each of the principal 



SPECIAL OBSTACLES. 29 

organs and tissues, though every one is acted on by the state 
of all the others, and though the peculiar conditions and gen- 
eral health of the organism co-operate with and often predom- 
inate over, the local causes, in determining the state of any 
particular organ." 

40. Obstacles which Political Economy Encounters.— 
It is worth while to note certain obstacles which the econo- 
mist encounters in his efforts to secure the popular recognition 
and acceptance of the laws of wealth, as he discerns them in 
his study of man and society. Two of these may be regarded 
as wholly peculiar in kind, or highly peculiar in the degree in 
which political economy encounters them. 

The first is well expressed by Prof. Cairnes : " Its close 
affinity to the moral sciences brings it constantly into collision 
with moral feelings and prepossessions, which can not fail to 
make themselves felt in the discussion of its principles ; while 
its conclusions, intimately connected as they are with the art 
of government, have a direct and visible bearing upon human 
conduct, in some of the most exciting pursuits of life." Arch- 
bishop Whately had the same in view when he remarked that 
the demonstrations of Euclid would not have commanded uni- 
versal assent had they been applicable to the pursuits and 
fortunes of individuals. 

41. Another of the obstacles referred to is found in the fact 
that political economy has to do with affairs so ordinary and 
familiar that men, in general, feel themselves competent, 
irrespective of study or of special experience, to form opinions 
regarding them. The more closely men are concerned with 
any matter, the harder it is to maintain the authority of the 
learned body which assumes to engross scientific knowledge 
on the subject. 

Few are presumptuous enough to dispute with the chemist 
or mechanician upon points connected with the studies and 
labors of his life ; but almost any man who can read and 
write feels at liberty to form and maintain opinions of his 
own upon trade and money. 

Now, this is not wholly of evil. The plain common-sense of 
unlettered men has not infrequently served as a corrective to 



3° POLITICAL ECONOMY. 

economic doctrines too finely drawn for the purposes of legis- 
lation, perhaps based upon a partial and disparaging view of 
human nature. But while thus, in the application of political, 
economy to the art of statesmanship, the self-assertion of the 
uninstructed mind has not been without its advantages, this 
disposition has certainly hindered the development of political 
economy as a science. The economic literature of every suc- 
ceeding year embraces works conceived in the true scientific 
spirit, and works exhibiting the most vulgar ignorance of his- 
tory and the most flagrant contempt for the conditions of 
economic investigation. It is much as if astrology were being 
pursued side by side with astronomy, or alchemy with chem- 
istry. 

42. A third obstacle which political economy encounters- 
arises from the use of terms derived from the vocabulary of 
every-day life, such as value, exchange, wealth, rent, profits — • 
with some of which are associated in the popular mind con- 
ceptions inconsistent with, or, at times, perhaps antagonistic 
to, those which are in the view of the writer on economics. 
Thus, as we have seen, the economist uses the word, value, in 
the single sense of power-in-exchange. Common speech makes 
every thing valuable which is useful, desirable or meritorious, 
irrespective of the consideration whether, by reason of its 
scarcity or the difficulty of securing it, this or that article so 
spoken of confers upon its possessor the power of command- 
ing in exchange the labor, or the products of the labor, of 
others. 

The chemist, the geologist, the botanist, on the other hand, 
invents terms for the classes of objects or the classes of phe- 
nomena which he is to discuss. The reader carries with him 
into the discussion only the idea of the thing which the author 
has created for the purpose. If the writer be clear, and the 
reader be careful, there is no danger of a failure of understand- 
ing. But, no matter how precise the one may be in definition^ 
or how close the attention of the other, it is inevitable that the 
use, in economic discussion, of terms taken from the vocabu- 
lary of common life, should engender confusion, from the 
practically irresistible tendency of the mind of the reader, and 



DEPARTMENTS OF THE SCIENCE. 31 

even, in a degree, of the writer, to slip back to the habitual 
meanings of the words employed. 

43. So strongly has this last disadvantage pressed upon 
some writers, that they have been impelled to resort to 
strange and foreign terms to obviate the difficulty. Thus, 
Archbishop Whately, treating political economy as the sci- 
ence of exchange, introduced the Greek word, Catallactics, to 
express the scope of his inquiry ; and Prof. Hearn has given 
to his admirable book the name, Plutology, to escape the vague- 
ness of meaning which he thought he saw in the popular use 
of the word wealth. 

44. The Departments of Political Economy. — All the 
questions of political economy are both conveniently and 
appropriately discussed under four titles : Production, Ex- 
change, Distribution and Consumption. 

Of late, a disposition has been manifested, on the part of 
many writers, in England and America, to drop these familiar 
titles ; to decline to admit any departments in political econ- 
omy ; and to treat of production and distribution, e. g., as not 
separable in economic discussion. 

This has unquestionably been stimulated, if, indeed, it has 
not been generated, by the wish to bring political economy 
into a strictly scientific form, with which the recognition 
of distinct departments has been deemed incompatible. It 
may be doubted whether our knowledge of the laws of wealth 
has yet reached the degree of completeness and assurance 
which would allow a science to be constituted after the lofty 
ideal of these writers. Meanwhile there seems reason to 
believe that the abandonment of the familiar and useful terms, 
production, exchange, distribution and consumption, has 
caused some very important considerations to be overlooked. 
" Nothing," said Edmund Burke, " is so great an enemy 
to accuracy of judgment as a coarse discrimination ; a 
want of such classification and distribution as the subject 
admits of." 

Now, clearly the subject, wealth, admits of being considered, 
first, with respect to the motives which lead to its production 
and the conditions under which production takes place ; 



32 POLITICAL ECONOMY. 

secondly, with respect to the laws which govern the exchange 
of products in the market ; thirdly, with respect to the forces 
which distribute the product of industry, in larger or smaller 
shares, among the several classes of persons who take part in 
production ; fourthly, with respect to the influences which the 
different modes of consumption exert upon the disposition 
and the ability to take part in the future production of 
wealth. 

And if wealth admits of being considered in these several 
aspects, it seems to me clear that such a classification will con- 
duce both to completeness of view and to accuracy of judg- 
ment. We shall have occasion to note (Pars. 247-249), a 
very striking instance of the mischief that has arisen 
from the neglect of this classification by recent writers in 
economics. 



PART IL— PRODUCTION. 



CHAPTER I. 

LAND AND NATURAL AGENTS. 

45. What is the Production of Wealth ?— By this term we 
signify all those acts and courses through which it comes 
about that an article confers upon its possessor the power, 
irrespective of legal authority or personal sentiments, to com- 
mand, in exchange for itself, the labor, or the products of thfe 
labor, of others. Briefly and somewhat elliptically, we maj 
say, the production of wealth means the creation of values. 

This, of course, does not imply the creation of matter \ 
it does not, of necessity, imply even a change of form in the 
thing which before had not value but now becomes possessed 
of it. 

46. Modes of Production. — A distinguished German pro- 
fessor has classified values, in respect of their origin, as time- 
value, place-value, and form-value. Thus, a cake of ice which 
has no value in the winter may acquire value through being 
kept over into the following summer. The preservation of 
the ice, whatever of effort and care and expenditure that may 
involve, is the production of wealth to that extent. The 
value thus created would be, in the phrase of Prof. Knies, 
time-value. 

Again, a cake of ice which has in summer a certain value in 
the region where it was first formed, say, Maine, would have 
a much higher value in a semi-tropical region, where water 
is seldom frozen at any season of the year, say, Louisiana. 
The transportation of the ice, and its protection from the melt- 
ing heat of the climate, would be a further production of 



34 POLITICAL ECONOMY. 

wealth. The value thus created would be, in the phrase of the 
writer already quoted, place-value. 

In neither this nor the former case has human effort effected 
the formation of the ice, which work was the gratuitous oper- 
ation of nature. The vast bodies of values created by com- 
merce are mainly what would be termed place-values, the 
value created in giving form to the articles concerned being 
but small in comparison. 

In the creation of form-value, there is the widest possible 
range of operations, mechanical or chemical, from that of the 
agriculturist, by whose intervention the black earth of the 
prairie is transmuted into golden grains, to that of the lace- 
maker, whose whole industry is to arrange his gossamer into 
fantastic shapes. However little the material may be wrought, 
and by whatever agencies that little may be effected, we say 
that wealth is produced whenever value is added or acquired 
through any act or any process. 

47. The Agents of Production. — The three primary agents 
in the production of wealth are Land, Labor and Capital.* 

48. Land — The school of economists in Prance, prior to the 
revolution, who were known as the Physiocrats, insisted upon 
regarding land as the sole source of wealth. According to this 
school, of which the physician Quesnay was the founder, labor 
is incapable of creating value except as employed upon the 
soil. Agriculture is, therefore, the sole means of increasing 
the wealth of a nation. All applications of labor or capital in 
manufacture, in transportation, or in trade, must be barren, 
since there is no net produce remaining, as in agricultui'e,f 
after the expenses of cultivation have been met. 

There was this much of truth in the physiocratic theory, 



* Labor will form the subject of Chapter II of the present book; Capital, 
the subject of Chapter III. We shall necessarily speak of labor and of 
capital before reaching those topics, in their due order, but what we shall 
thus say will be confined within limits which will allow no misunder- 
standing on the part of the reader. 

f That there is a surplus in agriculture, over the cost of production, is 
sufficiently proved by the payment of rent to the owner of land. (See 
Chapter on Rent.) 



THE GREAT LAW OF AGRICULTURE. 35 

that the raw material of all manufactures, the subject matter 
of all trade and transportation, comes originally from the 
soil ; and its value can not escape the influence of the great, 
comprehensive principle to which we give the name, " the law 
of diminishing returns in agriculture," the principle, namely, 
that after a certain stage of cultivation has been reached, the 
soil fails to yield a proportionally increased return to new 
applications of labor and capital. Since, then, this law is so 
far-reaching and all-embracing that even the operations of 
trade and manufacture do not escape its influence, it requires 
to be stated here with great precision and fullness of illustra- 
tion. There is no use in the reader going on if he does not 
master this principle in all its bearings. He might just as well 
stop short here, for, as Prof. Cairnes has said, if this prin- 
ciple did not exist, " the science of political economy would 
be as completely revolutionized as if human nature itself were 
altered." 

49. The Great Law of Agricultural Production. — In any 
given condition of the art of agriculture, there is a limit to 
the amount of labor and of capital which can advantageously 
be employed or expended upon a given area of land. If, after 
this limit has been reached, more laborers are employed, each 
will have to be content with a smaller quantity of produce at 
harvest. And, in the same way, if more capital be expended 
upon the land, each dollar of capital — whether in the form of 
hoes or carts or oxen, will make a smaller addition to the crop 
of the year than a dollar expended before the point of dimin- 
ishing returns was reached. We shall sufficiently illustrate 
the principle if we confine our view to applications of labor, 
assuming the amounts of capital to increase correspondingly 
with the number of laborers. 

50. Increasing Returns. — Let us suppose that ten labor- 
ers, with a certain outfit of tools and implements, are engaged 
in cultivating, in common, a tract of land of a hundred acres, 
producing 2,000 bushels of wheat a year, being twenty bushels 
per acre, and two hundred bushels per capita. Now, let it be 
supposed that two new laborers appear and join themselves to 
this company. What will be the crop of that year for the 



36 POLITICAL ECONOMY. 

united twelve, assuming agricultural conditions constant? 
Will it be 2,400 bushels, or more, or less ? The answer to this 
question will depend upon whether the point of diminishing 
returns has been reached with the original ten laborers, or 
not. If not, the crop of the new year may be not merely 
2,400 bushels, but even more, say, 2,500 bushels, since, the 
limit of the chemical capabilities of the soil not being reached, 
the mechanical advantages which result from the division of 
labor, to be explained under a subsequent title, will enable 
the twelve laborers to raise more, per man, than the ten 
could do. 

51. Diminishing Returns.— But if the limit indicated in 
paragraph 49 had been reached when the ten were laboring 
together upon the land, the new crop will fall short, much or 
little, of 2,400 bushels ; and consequently, each of the twelve 
laborers will have to be content with less than 200 bushels. 
Let us suppose the crop to amount to 2,280 bushels, each acre 
producing 22.8 bushels. Each man will, then, receive 190 
bushels as his share. 

Now, let it be supposed that three additional laborers are 
received into the company. Will the crop now be 3,000 bush- 
els, or 200 bushels per man of the fifteen ? Clearly not. Will 
it prove to be 2,850 bushels, 28.5 bushels per acre, giving each 
man 190 bushels as his share, as before ? Not if the industrial 
character of the laborers and the knowledge of the art of agri- 
culture undergo no change. If twelve laborers make the land 
yield but 22.8 bushels per acre, the fifteen can not make the 
same amount of land yield 28.5 bushels per acre. The crop 
will be something less than that : say, 27 bushels per acre, 
which would give each man 180 bushels. 

If, again, we suppose five additional laborers to join the 
company, the crop will not be 40 bushels per, acre ; as would 
be necessary in order to give each man 200 bushels, which the 
original ten received ; or 38 bushels per acre, as would be 
necessary in order to give each man 190 bushels which the 
first twelve received ; or even 36 bushels per acre, as would be 
necessary in order to give each man 180 bushels, which the 
first fifteen received ; but the crop could not be forced by the 



DIMINISHING RETURNS. 



37 



labor of twenty laborers above, say, 32 bushels per acre, which 
would give each of the laborers 160 bushels. 



No. of laborers. 



No. of bushels per 
acre.j 



Total No. bushels on 
the whole tract. 



Each laborer'8 
share. 





10 


20 


2000 


200 




12 


22.8 


2280 


190 




15 


27 


2700 


180 




20 


32 


3200 


160 



In like manner, it would be found that, however far the 
accession of new laborers were carried, each new arrival would 
result in reducing the quantity of grain which each laborer of 
the entire body could obtain by a year's work. This reduc- 
tion of the per capita produce would go forward, at first slowly 
and afterwards rapidly, until the result would be reached, that, 
whereas the original company lived comfortably, or even lux- 
uriously, the forty or fifty who had come to work on the same 
area would be found living wretchedly, perhaps reduced to 
the verge of starvation. 

52. This Condition is Universal. — About the universal ap- 
plication of this condition there can be no intelligent question. 
There is not an acre of land on the face of the earth on which 60 
and afterward 120 bushels of wheat can be raised by the appli- 
cation, first of twice, and afterward of four times, the amount 
of labor needed to produce 30 bushels. At some time in the 
progressive cultivation of every field, sooner or later, accord- 
ing to the state of agriculture, a stage will be reached after 
which every successive increment of the product will be 
obtained only through a more than proportional expenditure 
of labor. This condition applies, not only to the cultivated 
field, but to grazing lands, to the mine, the forest and the sea. 
It governs the cost of producing fish and whale oil ; fuel and 
timber for manufactures ; coal, iron and copper, for the fur- 
nace and the forge ; wool for clothing, and the carcasses of 
cattle and sheep for food. The operation of the principle is 
in some of these cases obscured by the accident of great dis- 
coveries of natural stores and resources, or important inventions 



38 POLITICAL ECONOMY. 

in the chemical or mechanical arts involved in the extraction 
of these articles for the use of man.* 

53. The Law of Diminishing Returns in Application to 
Manufactures. — Such is the law of diminishing returns in agri- 
culture. As has been stated, no part of the field of produc- 
tion but is overshadowed by this great dominating condition 
of human life and labor. Not only is the whole body of agri- 
cultural produce subject to its influence, but the raw material 
of all manufactures, and the subject matter of all trade and 
transportation, coming originally from the soil, are affected in 
value by the increasing difficulty which attends each suc- 
cessive increment of product. 

But while no part of the field of production lies beyond the 
shade of this primary condition, various classes of products 
are affected by it in very different degrees, according as they 
stand nearer to, or further from, agriculture or the purely 
" extractive " industries. Thus, every product of iron, is in 
some measure, subject to the influence of this condition. If 
a greater and still greater quantity of iron ore is to be derived 
from a given number of known mines, this involves mining 
at a lower and still lower depth, which, in turn, involves a 
greater expenditure of labor in hoisting, ventilating, pump- 
ing, etc. 

But it is only the iron, as ore, or as an ore product, which 
is subject to this condition. If a hundred weight of ore be 
rendered into pig iron, the cost of the latter will be very much 
increased by the necessity of mining at an increasing depth. 
If the pig iron be taken to the forge or foundry, and there 
rendered into plate iron or stove castings, the cost of the latter 
will be enhanced but little if any more, since the production 
of wealth, {i. e.,the creation of values) by mechanical pro- 

* It has been shown that this principle of increasing difficulty, or of 
diminishing returns, applies even to the harvesting of crops. Roscher 
quotes from Von Thtinen a table showing the experience of agricultural 
laborers in attempting to glean all the potatoes of afield. Supposing 100 
scheffels to represent the quantity grown on a given area, a single laborer 
could gather 30 in a day, while the average of the first four laborers would 
be 20. But the fifth man would only gather 6. 6 ; the sixth man only 
4.4 ; the seventh man only 3, and so on. 



DIMINISHING RETURNS. 39 

cesses, is not subject to the law of diminishing returns. Ten 
men in mechanical pursuits can produce ten times as much as 
one. If, again, the iron be rendered by successive processes 
into fine screws, knife-blades or watch springs, the first cost of 
the material becomes small, in comparison with the cost of 
the labor expended in working and perfecting it. 

Mr. Babbage, in 1832, estimated that bar iron of the value 
of $1 became worth when manufactured into — 

Slit iron for rails . . . . $ 1.10 

Horseshoes 



Wood saws 
Scissors, best 
Penknife blades 



2.55 

14.28 

446.94 

657.14 



It is evident that the only part of the cost of the $657 
worth of knife blades, here, which is affected by the condi- 
tion of diminishing returns, is the original dollar's worth of 
bar iron, and the cost of the bushel or two of coal necessary 
to produce the mechanical power and the melting and temper- 
ing heat for the successive processes of manufacture. An 
increase of the difficulty of mining which should double the 
price of bar iron might affect the price of scissors very 
slightly. 

54. So far, then, as human wants can be met through the 
elaboration of the raw materials taken from the soil, there is 
a constant tendency to a greater and still greater satisfaction 
of those wants, through the perfection of mechanical and 
chemical processes. But, after all, the chief concern of the 
masses of the people is with the cost of the raw materials of 
food, clothing and shelter. The bulk of their consumption is 
of coarse forms of agricultural produce, simply prepared. It 
is of no advantage to the laborer that at a small additional 
expense he can have his cotton wrought into forms which a 
century ago would have excited the admiration of a court, if 
all the cotton he can procure is not enough to keep him 
warm. 

55. The Soil, a Fund for the Endowment of the Human 
Race. — Subject always to the condition which has been 
described in the foregoing paragraphs, the soil, consisting of 



4° POLITICAL ECONOMY. 

rock pulverized at one period or another of the world's exist- 
ence, constitutes the sole original endowment of the human 
race. The different varieties of soil possess the capability of 
rewarding human labor in very different degrees ; but every 
kind of decomposed rock will, if treated with due quantities 
of water, yield vegetables, grains or fruits for man's food, 
fibers for his clothing, timber to construct his house, fuel to 
warm it. Even the undecomposed rock which forms the 
crust of the earth, constitutes a store from which human 
wants may be supplied, though in smaller degree and with 
greater pains. Metals and minerals, of an almost infinite 
number of uses, mechanical, chemical, physiological, are 
extracted by the aggressive enterprise of man from the very 
rock which has withstood unbroken all the effects of fire and 
frost, earthquake and torrent. It is wholly upon this natural 
endowment that the race have lived in the past ; and it is the 
extent of this endowment which is to determine the maximum 
number the race can reach, aud the longest period of time 
through which the race can survive. Now, of this fund with 
which mankind are endowed, we note, in addition to the lim- 
ited capability of production within a given season, upon a 
given area, already dwelt upon, that the fund, in the present 
state of the art of agriculture, is subject to waste and possible 
ultimate exhaustion. 

56. Exhaustion of the Soil. — Those writers who advocate 
what is known as the policy of Protection, have made great 
use of the fact that the soil is subject to exhaustion ; that its 
productive capabilities are, in the strict sense of the word, a 
fund, from which so much and no more can be taken. Besides 
the outright destruction of fertility due to wanton abuse of 
nature, the ordinary prudent use of the soil steadily dimin- 
ishes the fund of productive essences from which future gen- 
erations must draw their supplies of food, clothing and shelter. 
" For every fourteen tons of fodder carried off from the soil," 
says Prof. Johnston, " there are carried away two casks of 
potash, one of soda, a carboy of vitriol, a large demijohn of 
phosphoric acid and other essential ingredients." 

But what becomes of the materials thus taken away? 



EXHAUSTION OF THE SOIL. 41 

Surely, if the doctrines of modern physical science are true, 
no force can be lost out of nature ; consumption must be fol- 
lowed by production in other forms ; or, rather, consumption 
is nothing but the production of new forms. 

It is true that no force can be lost out of nature ; yet force 
may be transmuted from forms in which it ministers to human 
wants into forms in which it serves no purpose useful to man, 
as, for example, when your house burns down and goes off 
into the air, in sudden heat and with a great smoke ; or a cer- 
tain amount of force may be so dissipated that men can no 
longer employ it for their advantage. The productive essen- 
ces taken from the soil, in the form of food for man and beast, 
may, without being diminished in actual amount, be so scat- 
tered as to be unavailable for the nourishment of vegetable 
life in the future. 

"Whenever," says Prof. R. E. Thompson, "the products 
of the soil are consumed in the vicinity of the farm, the far- 
mer will have at hand the means of making such a return to 
the soil as will keep up and even increase its fertility. But 
whenever they are transported to a considerable distance for 
consumption, the power to make an adequate return to the 
soil is seriously diminished, if not absolutely destroyed. The 
richest soil can not long sustain such a process of exhaustion, 
if its proprietors are engaged in sending its natural wealth 
over land and sea to a distant market". 

57. Free Trade and Exhaustion of the Soil. — It is upon 
this the protectionist bases his chief argument. He claims 
that local markets should be everywhere created to prevent 
what he calls " earth-butchery." The tendency to make new 
countries the magazines from which older countries draw their 
supplies of raw materials should be crossed and checked by 
legal impositions, not so much upon the exportation of the 
raw materials from the former, as on the importation of fin- 
ished products from the latter. Every considerable community 
should be driven, against the impulses of immediate interest, 
to fashion for its own consumption the materials produced from 
its own soil. 

Now, the most obvious and natural answer to this is, that 



4 3 POLITICAL ECONOMY. 

men are the best judges of their own interests, and that pro- 
ducers and consumers should be left to make their bargains 
unhindered. But it will appear, in the further progress of our 
inquiry, that the interests of individuals do not always consist 
with the interests of the community. This is clearly seen, in 
the case of the felling of the forests, where immense injury 
may be done to the soil, an injury perhaps that is practically 
irreparable, through the selfish action of a few persons seek- 
ing their own immediate advantage. 

If the same is not true in an equal degree of the abuse of 
the soil through an excessive drain upon its productive 
essences, due to the passion for sudden gain inducing the cul- 
tivators to take much from the ground and put back little, 
this is due to two facts. First. The arable land of a country 
is generally owned by a larger number of persons than the 
wood land, so that more of those who would suffer by the 
effects of an abuse of nature are in a position to prevent abuse. 
Secondly. The consequences of " earth-butchery " in the 
destruction of forests are more instant and less remediable 
than in the waste of the soil in cultivation. 

58. Some Waste Unavoidable. — The liability to exhaus- 
tion of the soil, through exportation of its produce, is a fact 
properly to be taken into account. The importance which 
should be attributed to the fact is a matter of question. I 
believe the protectionist writers generally give it more weight 
than it deserves, chiefly through omitting two considera- 
tions. 

First. Even the building up of manufacturing and commer- 
cial towns would not prevent a large part of the waste. 

In nearly all such towns, when of considerable size, the 
excreta of men and even of animals, and, also, to a great 
extent, the refuse of kitchens and of manufactures, are thrown 
into the streams and carried out to sea. The utilization of 
sewage, on any large scale, has never yet been made profita- 
ble. It has been done as a matter of experiment, as a matter 
of sentiment, or to prevent the defilement of rivers ; but" 
almost invariably it costs, in the present state of the arts, more 
than a hundred cents on the dollar's worth of soil-dressing 



RENEWAL OF THE SOIL. 43 

obtained. Some waste of this kind seems inseparable from 
the human occupation of the earth. 

59. Natural Benewal of the Soil. — Secondly. The protec- 
tionist's argument overlooks the consideration that, in addi- 
tion to the progress of invention, postponing, though it may 
not avert, exhaustion, a continuous addition is being made to 
the soil available for the raising of food, through the decom- 
position of rocks and the formation of rockdust (weathering). 
The mountain loses of its substance by the force of frosts and 
floods, and the valleys are enriched with the material thus 
worn away. Even the stones that lie in the earth, a mere 
encumbrance to cultivation, yield to the unceasing action of 
the elements that surround them and give up to the soil the 
same properties to which its pristine fertility was due. More- 
over, the conversion of the nitrogen of the atmosphere into 
nitrates (nitrification), is continually going on. " In rare 
cases," writes one of the most eminent of agricultural chem- 
ists, " these agencies alone maintain a high state of fertility, 
as where red-rock easily disintegrates and is exceptionally rich 
in plant food, or where plains are fertilized by the matter 
brought from mountains and deposited by streams. More 
commonly, these natural causes maintain a moderate produc- 
tiveness only, and require tillage, irrigation and manuring to 
raise the production to a high pitch : tillage, irrigation and 
manuring all operating to accelerate and intensify rock-disin- 
tegration and nitrification ; irrigation and manuring acting 
also by replacing removed matters. 

" Any region that has once been fertile for a period of fifty 
years, under a given system of management, may remain fer- 
tile under that system forever, unless the soil is removed or 
buried by flood, or unless the climate becomes unpropitious."* 

*Prof. S. W. Johnson, of Yale College, Director of the Connecticut 
Agricultural Experiment Station. 

Prof. Johnson further remarks : " The crops that astonish us by their 
heavy acreage-yield are not the crops that feed the nations. The wheat 
fields and corn fields of ' the West ' yield but 15 bushels of wheat and 
but 40 to 50 bushels of corn. The hay, the pasturage, which make up 
the grand total of our forage, are obtained at an average rate of one ton, 



44 POLITICAL ECONOMY. 

CHAPTER II. 

LABOR. 

60. The Hunter State. — The second great agent in the pro- 
duction of wealth is human labor. Up to a certain low point, 
the grosser human wants are supplied by the bounty of 
nature. So long as this continues, value does not emerge ; 
wealth is not produced. Man may live like the squirrels or 
the monkeys, from the spontaneous fruits of shrubs and trees ; 
or, like other large and fierce animals, he may prey upon 
smaller and weaker species, which, in their turn, are nourished 
without care by grasses or nuts. So long as races of men 
subsist in this fashion, they are doomed to remain few in num- 
bers, low in character, subject to occasional visitations of 
famine, the victims of ferocious enemies among the higher 
orders of animals, or of internecine war in the unceasing strug- 
gle for existence. Political economy has no more to do with 
men in such a state than with the monkeys who compete with 
each other for cocoanuts and bananas. 

61. The Pastoral State. — Labor, in the economic sense, 
* first clearly appears in the pastoral state. Here men no longer 

subsist on the bounty of nature, or perish miserably and help- 
lessly when that bounty fails. They no longer hunt for nuts 
and roots and fruits which have grown without care and with- 
out labor, or for casual animals nourished upon the spontane- 
ous products of the soil, bred and reared without human 
intervention. In the pastoral state, tribes tame the cattle and 
sheep and goats and asses which once ran wild, training them 
to be easily guided, handled and controlled, caring for their 

per acre. The 40 bushels of wheat, 90 of corn, 2\ tons of hay, that good 
farmers, in long cultivated regions, gather, per acre, from small areas, 
are exceptional. For these exceptional natural fertility, or natural 
manuring, or else exceptional artificial fertilization are required ; but for 
the agricultural production of the world " im grossen und ganzen " small 
crops per acre, fed mostly by natural disintegration of the soil and nat- 
ural nitrification, as by natural rainfall and natural supplies of carbonic 
acid and solar energy, are the rule." 



DEVELOPMENT OF AGRICULTURE. 45 

subsistence, driving them to fresh pastures, digging wells or 
diverting streams to give them a constant supply of water, 
even cutting the abundant food of summer and curing and 
storing it against the season of scarcity. The hunter pro- 
tects the animals he has tamed against those that still remain 
savage, and folds or houses them against severe storms and 
protracted cold ; he bleeds, blisters and physics them in sick- 
ness ; superintends their breeding after their kind, and cares 
for the young far beyond the power or the wisdom of the 
dam. By all these forms of labor, men in the pastoral con- 
dition make that to be wealth which in a state of savagery 
was no wealth. 

62. — And of this social condition we note two things : 
First, population increases largely. It requires many thousands 
of acres to support a family of hunters ; as many hundreds 
will support a family of shepherds. The animal that in the 
one condition yielded, once for all, a carcass of three or four 
hundred pounds net, now returns, for the little care given her, 
five hundred gallons of milk every year, making, if the owner 
pleases to expend some additional labor, three hundred pounds 
of cheese. Another animal that once yielded a carcass of 
fifty pounds, covered with a pound of coarse stiff hair, now 
parts every year with four or five pounds of soft, flexible 
wool, susceptible of being wrought into forms of the greatest 
beauty and usefulness. 

Secondly, the subsistence derived by communities in the 
pastoral state is not only more ample ; it is also far more 
secure. Men are no longer subject to be swept by famine, 
as by a hurricane, from the face of the earth. In the main, 
subsistence, and with it existence, has ceased to be precarious ; 
it has become constant and calculable. 

63. Agriculture, — The next economic state is reached in 
agriculture. Man no longer skims the surface of the land ; 
he plows into the depths of the soil, and brings up the pro- 
ductive energies that lay hidden far below the roots of the 
grass on which the cattle were wont to graze. And now, 
where hundreds of acres were required to support a family, 
as many score suffice. Population rapidly increases. Man 






46 POLITICAL ECONOMY. 

and beast no longer wander to seek their food. Food is 
brought to them. Tribes cease to shift their place from 
Beason to season as the exigencies of pasture demand. The 
cottage replaces the tent. New wants are felt, now that men 
are not obliged to carry around with them all they own. 
New and varied forms of wealth appear. 

To do only the things which formerly were done, would 
require less exertion, and consequently values tend to dimin- 
ish, since value measures, speaking roughly, the difficulty of 
attainment ; but more things now require to be done ; there 
are more who feel wants, and each of them feels more wants, 
than formerly, and hence the body of values increases, in the 
face of improvements in the arts which tend to substitute 
gratuity for value. 

64. Two Factors of Labor Power. — The labor power of 
any community, whether in the pastoral or in the agricultural 
state, or in the higher state where manufactures and com- 
merce enter, is compounded of two factors, that derived from 
the efficiency of the individual laborer, and that derived from 
what we call by the somewhat unsatisfactory term, the 
division of labor, which embraces the joint action of men in 
production, the differentiation of productive processes, the 
specialization of trades and the organization of productive 
forces. 

65. The Efficiency of the Individual Laborer. — The 
degree in which the labor of an individual shall be efficient in 
the creation of values, i. e., the production of wealth, depends 
upon several causes. 

First : His inherited strength, his original endowment of 
physical force. This endowment varies greatly, not only as 
between individuals of the same community, but as between 
communities, races and nations. Into the causes of the 
differences in this respect existing, it is not necessary to enter. 
That inquiry belongs to the physiologist and the ethnologist. 
The economist has to do only with the fact. In the matter 
of sheer lifting-strength alone, the individuals of one race 
may, on the average, surpass those of other races by fifty, one 
hundred or two hundred per cent. ; while in the matter of tha 



THE LABORER'S FOOD. 47 

use of that strength, in operations at once difficult and deli- 
cate, the range of existing differences is very much wider. 

66. Belation of Food to Industrial Efficiency. — A second 
reason for the higher industrial efficiency of the laborers of 
one class or nation than belongs to those of another, is found 
in the quantity and quality of the food consumed by the 
laborers of the two classes or nations, respectively. The 
human stomach bears much the same relation to the whole 
frame as the furnace to the steam engine. In the one, as in 
the other, must all the forces which are to drive the machine 
be generated. In the one, as in the other, the force gener- 
ated will, within certain limits, increase with the material 
supplied. With more fuel, the engine will do more work. 
With more food, the man will do more work. 

But not proportionally more. To a great extent the return 
made, in force, to the introduction of new fuel into the fur- 
nace varies according to a principle which is strongly analo- 
gous to that which governs the returns made, in crops, to the 
application of new labor to land. Thus, if we suppose that, 
with a furnace of a given height of chimney, 3 lbs. of coal to 
the square foot of grate surface, are supplied, we should have, 
resulting from the consumption, a certain amount of force 
available to do the engine's work. But that amount would be 
small. A great part of all the heat generated would be lost 
by radiation in the tubes and through the cooling effect of 
the water in the boilers. Now, suppose that, instead of 
3 lbs., 6 are consumed. Will the efficiency of the engine be 
doubled merely ? No, the engine Avill do easily three times 
as much work. If 9 lbs. are used, the power will be still fur- 
ther increased, not only positively but proportionally, that is, 
there will not only be more power, but more power for each 
pound of coal. If 12 lbs. are consumed, there may be a still 
further addition to the force generated, not only positively 
but proportionally. It might be easily found that, with this 
amount of fuel, the resulting force would be, not four times 
as much as with 3 lbs., but eight or ten. 

The parallelism which exists between the economy of apply- 
ing labor to land and the economy of supplying fuel to the 



48 POLITICAL ECONOMY. 

furnace, is broken at one point. Labor may be applied to land 
indefinitely with an increase of absolute, though not always 
of relative, production. But coal can not be added indefinitely 
to tbe fire beneath the boiler. 

67. The economy of supplying food to the human machine is 
in a high degree analogous. If, for example, a laborer were sup- 
plied with only 100 oz., per week, of a certain kind of food, the 
laboring power which would be generated by the digestion and 
assimilation of that food would be very slight. After a course 
of such diet, the man would crawl feebly to his task ; would 
work with a very slight degi-ee of energy when he first started 
out, and would soon become exhausted. Were 125 oz. given 
to the laborer, he would be able, with no greater strain on his 
constitution, to accomplish an amount of work which would be 
not merely one quarter more, but largely in excess of it. He 
would perhaps be able to do one-half as much more. Were his 
subsistence to rise to 150 oz. there would be a still further gain. 
His efficiency would be to his efficiency when receiving 125 oz., 
not as 6 to 5, but as V, or perhaps 8, to 5. With 150 oz., the 
laborer's diet might be regarded as sufficient for comfort, 
health and a reasonable development of muscular strength. 
Let the amount of food be carried up to 200 oz., and we 
should have a liberal, generous diet, ample to supply all the 
waste of the tissues, and to keep the fires of the body burning 
briskly, generating force enough to allow the laborer to put 
forth great muscular exertions through long periods of time. 

Up to a certain limit, then, with food as with fuel, the true 
economy of consumption is found in increasing the supply. 
Niggardliness is waste, and waste of the worst sort. But 5 
just as there is a maximum limit with the fuel, so there is with 
food. After that limit is reached, the increase of food does 
not imply a proportional increase of force, if, indeed, any 
increase at all ; and after a certain still higher point is reached, 
the increase of food brings mischief. 

68. Under-fed Laborers. — The consideration here pre- 
sented is of great importance in explaining the varying effi- 
ciency of labor. Probably the inhabitants of the United 
States constitute the only large population in the world who 



THE LABORER'S FOOD. 49 

^re thoroughly well-nourished ; that is, who have enough of 
wholesome food to secure the greatest economy of consump- 
tion. " Many a French factory hand," writes Lord Brabazon, 
" never has any thing better for his breakfast than a large 
slice of common sour bread, rubbed over with an onion, so as 
to give it a flavor." " Meat," says a careful observer, " is 
rarely tasted by the working classes in Holland. It forms no 
part of the bill of fare, either for the man or his family." Of 
the laborers of Belgium, an official report states : "Very many 
have for their entire subsistence but potatoes, with a little 
grease, brown or black bread, often bad ; and for their drink 
a tincture of chicory." Even through large portions of happy 
England, the fabled land of the beef -eater, there is a mass of 
unimpeachable testimony to show that the working classes 
are able to obtain less nourishment by far than is necessary 
to the highest efficiency of their labor. " In the west of 
England," wrote Prof. Fawcett, in 1864, "it is impossible for 
an agricultural laborer to eat meat more than once a week." 
Of the peasantry of Devonshire, Canon Girdlestone wrote : 
" The laborer breakfasts on tea-kettle broth — hot water 
poured on bread and flavored with onions — dines on bread 
and hard cheese, at 2d. a pound, with cider very washy and 
sour ; and sups on potatoes or cabbage, greased with a tiny 
bit of fat bacon. He seldom more than sees or smells butch- 
er's meat." 

Now, as to the want of true economy in thus reducing the con- 
sumption of food among the working classes, there can not 
be a moment's question. The case may perhaps be best put 
by saying that if cattle were not kept better nourished than 
are the majority of laborers in the world, it would not " pay " 
to have cattle at all. It would be better to do without them 
entirely. Barely to keep them alive would require a large 
expenditure of food, and to give them, in addition to this, 
only enough to secure a low grade of muscular strength and 
activity, would not make them worth their keep. 

69. Influence of Sanitary Conditions on the Efficiency of 
Labor. — A third reason for the higher industrial efficiency of 
the laborers of one class or nation than of another, is found in 



50 POLITICAL ECONOMY. 

different sanitary conditions, especially those which concern 
the quality of the air. The food which is taken into the ani- 
mal system is converted into hlood which is kept in a state of 
purity by being oxydized in the lungs, through the process 
of breathing. In this process, the foul and stupefying ele- 
ment, carbon, is thrown off into the atmosphere, and the life- 
giving element, oxygen, is taken into the system. That this 
may be done, there should be, in all inclosed habitations, a 
sufficiency of space to each person and a free access of fresh 
air. Human beings confined in small, unventilated rooms in- 
evitably lose vigor ; the process of the oxidization of the blood 
being checked, the process of making blood, through the 
digestion and assimilation of the food taken into the stomach, 
is checked. With foul air, therefore, a smaller amount of 
muscular force is generated from the same amount of food. 
Not only so, but the food taken into the system may become 
an actual obstruction and cause of disease, through the failure 
of digestion and assimilation. Moreover, in close rooms, 
unventilated and uncleaned, the germs of certain diseases, 
known as filth-diseases, viz., typhus and typhoid fevers, scar- 
let fever, diphtheria and others, are preserved and readily 
communicated, to the impairment of health and the destruction 
of life. 

70. The cause here adduced is not of slight importance in 
accounting for the differences in the labor power of different 
communities and nations of men. 

As the people of the United States are the best nourished, 
so they are, by a long interval, the best sheltered people in 
the world. It is impossible for an American who has not 
traveled widely, to form an adequate conception of the man- 
ner in which the laborers of other countries are housed. " Hov- 
els, cellars, mere dark dens," wrote Mr. Inglis of the city 
homes of Ireland, in 1834, "damp, filthy, stagnant, unwhole- 
some places." 

In 1861, one-third of the population of Scotland lived in 
houses of one room only ; another third in houses of two 
rooms. In England the character of the country cottages and 
of the dwellings of the poorer classes in the cities is even 



THE LABORER'S LODGING. 5 1 

worse than in Scotland. Cases are not infrequent where fam- 
ilies of 7 to 13 members occupy a single bedroom. 

Of the cottages of Devonshire, Canon Girdlestone says : 
" They are, as a rule, not fit to house pigs in." The cottages 
of the County of Durham were thus described by the Poor 
Law Commissioners of 1842. "The average size of these 
sheds is about 24 by 16 feet. They are dark and unwhole- 
some ; the windows do not open, and many of them are not 
larger than 20 feet by 16 ; and into this space are crowded 
eight, ten, or even twelve persons." 

71. If this is the way Englishmen have to live in the coun- 
try, we might expect to hear worse things of the towns, where 
land is sometimes worth as many silver crowns as would cover its 
surface. Some years ago Mr. Edwin Chadwick declared that 
more filth, worse physical suffering and mental disorder than 
John Howard described in his account of the prisons of his day, 
were to be found among the cellar populations of the working 
people of Liverpool, Manchester, or Leeds, and in large por- 
tions of the Metropolis. Much has of late been done, both 
by private philanthropic effort and under the authority of law, 
to cure the evils described ; yet still much that is hideous 
remains. 

It is in such homes that the greater part of the present 
laborers of the world were born and reared. And it is in 
homes like these, that, in their estate as laborers, they have to 
live, to eat, to rest and to sleep after the exhausting toil of 
the day. It is not to be wondered at that children grow up 
puny and deformed ; that scrofula and rheumatism become 
deeply seated in the constitution ; that the blood grows foul 
and the pulse feeble ; that the efficiency of the laborer falls to 
a low point, while his power to labor at all becomes liable to 
be prematurely terminated. 

72. The Laborer's Intelligence. — A fourth reason for the 
superior efficiency of the laborers of one class or nation over 
those of another, is found in their higher intelligence. Intel- \s^ 
ligence is a powerful factor in industrial efficiency. I speak 
not now of technical knowledge, but of clearness of mind, j 
quickness of apprehension, strength of memory, and the power 



5* , POLITICAL ECONOMY. 

of consecutive thought, in no more than the degree in which 
these may fairly be expected to be found in a nation where 
popular education has existed for generations ; in the degree, 
for instance, in which they are found in New England, in 
Saxony, in parts of Scotland. 

The intelligent is more useful than the unintelligent 
laborer : 

(a) Because he requires a far shorter apprenticeship. He 
can learn his trade in a half, a third, or a quarter the time 
which the other requires, (b) Because he can do his work 
with little or no superintendence. He is able to carry instruc- 
tions in his mind, and to apply them with discretion to the 
varying conditions of his work, (c) Because he is less waste- 
ful of materials. In some branches of manufacture the value 
of the materials used is equal to the amount paid in wages. 
In others it is twice, thrice, and even ten times as much. A 
very little difference in the degree of thoughtf ulness, fore- 
sight and regard for instructions, on the part of the laborer, 
may make a great difference in the net product. 

73. (d) Because he readily learns to use machinery, how- 
ever delicate or intricate. The extent to Avhich labor is 
saved and power increased by the use of machinery hardly 
needs illustration here. It is only the intelligent workman 
who can freely avail himself of this great help. Brains are 
not alone required for the invention of machines ; they are 
wanted for their adjustment, their ordinary use, and their 
occasional repair. He who is to use a machine need not be 
the same man as he who made it ; but, to a great extent, he 
should be the same kind of man. 

74. Race Characteristics Regarding Machinery. — The 
capability of dealing with costly and delicate machines varies 
greatly between different races and nations of men. Notwith- 
standing the prodigious increase in the power of producing 
cotton goods, through the inventions of Watts, Arkwright, 
and Sitgreaves, vast quantities of cotton are still spun or 
woven by hand. In some of the countries of Europe, as 
Turkey and Greece, the ordinary " mechanical powers," the 
screw, the lever, the inclined plane, etc., are used but little, 



USE OF MACHINERY. 53 

or not at all, the lifting or pulling being done by direct phys- 
ical force, at, of course, the expenditure of a vast amount of 
animal strength. Even in highly civilized nations the appli- 
cation of agricultural machinery is limited by the inability of 
the peasantry to use it. The Judges of the World's Fair of 
1852 reported that there was probably as much sound, practi- 
cal labor-saving invention and machinery unused, at that 
time, as was used ; and that it was so far unused, " solely in 
consequence of the ignorance and incompetence of the work- 
people." 

75. Machinery in the United States.— The United States 
is the only country in the world, excepting some of the 
English colonies, in which it can be safely assumed of the 
average laborer that, after a reasonable period of experiment 
and trial, he will be able to use delicate and costly machinery 
to the advantage of his employer.* In all other countries, 
even the most civilized, it is only picked laborers who can use 
intricate machinery without doing more damage than their 
labor is worth. 

76. Cheerfulness and Hopefulness in Labor.— A fifth 
reason for the higher efficiency of the laborers of one class or 
nation than of another, is found in greater cheerfulness and v 
hopefulness, growing out of higher self-respect and social 
ambition, and a more direct and certain interest in the product 

cf industry. 

* A remarkable illustration of the strong natural aptitude of the 
American for the use of machinery, has come to my notice during the 
present year, 1887. A boot and shoe manufacturer, employing eleven 
hundred hands, had occasion, during a great and long-protracted strike, 
to replace considerably more than half of the old operatives by new 
hands. This branch of industry is well known for the vast variety of 
highly intricate and delicate machinery which it uses. Yet at the end of 
five months, during which this substitution had been carried through to 
completion, the machines in this factory were found, on careful inspec- 
tion, to be in absolutely as good condition, as at the beginning of the 
strike. 

Had an English manufacturer carried through such a replacement of 
old by new hands, his machinery at the end of that time would have 
been worth just what it would have sold for, by the pound, as old iron. 



54 POLITICAL ECONOMY. 

The first three causes which have been adduced are purely 
physical, affecting the laborer's muscular force and capability 
of endurance. The fourth cause adduced, viz. : the laborer's 
general intelligence, determines his intellectual qualification 
for his work, his ability to direct his bodily powers, such as 
they are, to the production of wealth, with the maximum of 
effect and the minimum of waste. The cause now adduced is 
moral, affecting the will. 

The importance of this cause is most conspicuously seen in 
the wastefulness and inefficiency of slave labor. Always and 
everywhere, that labor has been found to be vastly inferior to 
the labor of freemen. Even the stimulus of the lash fails to 
command the faculties which instantly spring into activity 
under the inspiration of an ample reward. Fear is far less 
potent than hope in evoking the energies of mind or body ; 
while efforts made under the influence of the former passion 
are far more exhausting than those made under the influence 
of the latter. 

77. Nearness and Directness of the Reward .— Even 
among free laborers, the degree in which the physical and 
intellectual powers may be engaged in the production of 
wealth d( pends greatly on the directness and certainty of the 
reward. This is proved by the difference everywhere observed 
between the exertions of wage laborers and those of men 
working on their own account. The wage laborer necessarily 
becomes, in a great degree, a time server, an eye pleaser. He 
saves himself as much as he can ; he counts his hours ; he 
measures the work he does. But more than this, a laborer 
not merely will not, he can not, the laws of human nature 
remaining the same, work as hard for another as he would if 
working as his own man. 

On the other hand, he who is working for himself keeps no 
grudging account of his time or exertion. If the proprietor 
of land, he knows that every stroke of his arm is creating 
wealth which he and his children are to enjoy ; that every 
straw saved is his own. He watches against waste with 
unfailing eagerness. His vines, his plants, his animals, his 
fences, his buildings, are borne upon his mind ; and no care 



HOPEFULNESS IN LABOR. 55 

or pains are withheld to guard them against the almost infinite 
forms of injury which beset these species of wealth. He is 
early afield, for the day is not long enough for all he wishes 
to do ; and when night falls, he still lingers, tying up his 
vines, tinkering his sheds, tending his cattle, bringing home 
the harvest. 

Even beyond the mere love of wealth, of what can be 
bought and sold, enters the love of his land, which is his own, 
which was his father's, which shall be his son's after him ; 
and he works upon it, sparing himself little more than does 
the mother caring for her child. " Give a man the secure 
possession of a bleak rock," said Arthur Young, " and he will 
turn it into a garden." The vineyards of the Rhine, built up, 
in many cases, of earth brought in baskets up the sides of the 
mountains, are speaking witnesses to the truth of this saying ; 
while many of the richest fields of Holland and Belgium, 
once drifting wastes, illustrate that other saying of the 
eminent traveler : " The magic of property turns sand into 
gold." 

78. Influence of Bad Laws in Producing Idleness. — 
Doubtless much of the indolence we have been accustomed to 
regard as constitutional with certain races and nations, and as 
indicating lack of physical endurance or feebleness of will, is 
due simply to the absence of incentive, resulting from unjust 
laws or bad social institutions. It would be enough to make one 
laugh to hear the Scotch spoken of as lazy. The energy and 
perseverance of that people have been illustrated in every 
quarter of the globe. Yet, three or four generations ago, the 
Scottish people, says Prof. Hearn, " were conspicuous for their 
incorrigible indolence." The ample explanation was found in 
the almost universal system of short leases or of tenancy at 
will. A single wise action of legislation cured this defect ; 
and with it disappeared the laziness of the Scotchman. 

Not half so long ago as that, the Irish were a proverb over 
Europe, for indolence and shiftlessness. Arthur Young 
describes them as " lazy to an excess at work," but " spirit- 
edly active at play." The Irishman of that day was spir- 
itedly active at play, because the fun was sure to be all his 



56 POLITICAL ECONOMY. 

own. There were no laws or institutions which robbed him 
of his sport. He was lazy to an excess at work, because invid- 
ious laws, social proscription and the customs relating to land 
kept from him a large part of the natural fruits of his labor. 
Every country of the globe has witnessed, since 1850, the 
indomitable pluck and energy of the Irish at work under 
equal laws and with " a fair chance." 

79. The Varying Efficiency of Labor. — I have indicated 
the chief causes which influence the efficiency of the individ- 
ual laborer in the production of wealth. The joint effect of 
all these is very considerable. Industrial operations conducted 
upon a large scale have shown that wide differences exist in 
the working power of men of different nations. In comparing 
the cost of constructing railroads in India and in England, for 
instance, it was found that, though the Indian laborer received 
but 4^ to 6d. a day, and the English laborer, 3s. to 3s. 6d., the 
sub-contracts in the two countries were let at the same prices. 
The English cotton spinner is paid as many shillings as the 
East India spinner gets pence ; yet the cotton cloth of En- 
gland undersells that of India in Indian markets. As between 
England and Russia, it is found that a weaver in the former 
country tends from two to three times as many looms as in 
the latter, the English looms, moving, moreover, at a higher 
rate of speed. 

As between England and France, the superiority of the 
labor of the former country has been repeatedly shown in 
great competitive experiments. Mr. Brassey states that, in 
the construction of certain French railways, it was found that 
the working capacity of the Englishman was to that of the 
Frenchman as five to three. Superior as are the workmen of 
England to those of other countries of Europe, they are, in 
turn, surpassed, on the average, by those of the United States, 
in the respects of strength, intelligent direction of force, and 
ability to use machinery to advantage. 

80. The Division of Labor. — The second factor of the 
labor power of a community is that which is commonly called 
by the unsatisfactory term, division of labor, embracing, as 
was said on an earlier page, the joint action of men in pro- 



THE DIVISION OF LABOR. 57 

duction, the differentiation of productive processes, the spec- 
ialization of trades, and the organization of industrial forces. 
The term, organization of labor, is perhaps the best single 
term that can be used to cover all this ground. 

In primitive society the division of labor does not exist, or 
is found only in a rudimentary state. Each able-bodied man 
does all which any one does. Each builds his wigwam or hut, 
shapes his bows and arrows ; cares for his horses, if he have 
any, and hunts or fishes in his own right and name. Yet, 
even here, the division of labor as between the sexes is in 
some degree carried out. The women make the nets, weave 
the blankets and cook the food, as duties suitable to their 
powers. 

Soon, however, emerges a division of labor founded on dif- 
ferences of capability less fundamental than those of sex. 
The smith appears, working at first alike in iron, wood and 
stone. He does all the work of this class which the commun- 
ity requires ; and, in return, receives flesh and fish from those 
whose spears and hooks are sharpened and pointed at his forge. 
As the amount of this class of work to be done increases, three 
smiths, instead of one, come to be employed ; one working in 
iron, one in wood, and one in stone, known respectively as the 
blacksmith, the carpenter and the mason. As the wants felt 
by the community are multiplied, as modes and fashions 
appear, new classes of artisans come into existence, each work- 
ing on some one class of substances, or making some one class 
of articles. The cabinet-maker follows the carpenter ; the 
jeweler the blacksmith ; the sculptor, in time, the mason. 
Finally, the operations of each trade come to be distributed 
among several distinct classes of laborers. 

81. How the Division of Labor Increases Production. — 
It is difficult adequately to appreciate the increase of pro- 
duction which results from the application of this principle. 

(a) It shortens apprenticeship. If each man had to learn 
the whole of a trade, much more to learn several trades, he 
would have to take a great deal of time and spoil a great deal 
of material and many tools in doing so. But when each 
workman is required to learn but a single trade, and, within 



58 POLITICAL ECONOMY. 

that trade, to practice only one simple operation, the period 
of instruction becomes very brief. The end of a few months 
finds him intelligent, if not expert, in his business. 

(b) It develops dexterity. Long after the workman has 
so far mastered his trade as to be able to perform its opera- 
tions without mistake, he continues to gain in productive 
power, through the incessant repetition of his task. The 
sense especially concerned in his work, be it sight, or touch, 
or hearing, becomes preternaturally acute. The muscles 
brought especially into play gain in size and activity. Even 
certain organs may become involved in the operations of the 
trade, and undergo changes which, whether favorable to the 
general health and symmetry, or not, are of a nature to facili- 
tate the customary work. Any one who watches a cashier 
counting notes, a telegraph operator sending messages, can 
see how wonderfully practice must come into industry, to 
make perfect the workman. 

82. (c) It obviates the loss of time and the distraction of 
thought which would be involved in passing from place to 
place, and in laying down the tools of one trade to take up 
those of another. In agriculture, where the division of labor 
can be carried but a little way, we know a great deal of time 
is thus lost. 

(d) It facilitates invention and leads to the discovery of 
improved processes and new materials. Practiced thus in 
detail, every art or trade is studied in detail, and, one by one, 
here a little and there a little, its mechanical possibilities 
come to be seen and realized. Some of the most conspicuous 
discoveries in the history of industry have, indeed, come 
through scientific research, or by casual suggestion ; but an 
infinite multitude of inventions and improvements in pro- 
cesses, accomplishing, in their aggregate effect, an incredible 
gain to productive power, have been the result of the minute 
study of the operations of industry, in detail, by men each of 
whom was dealing with a single class of substances, perform- 
ing a single operation, with the aid, perhaps, of a single tool. 

(e) It allows women and children, as well as men who are 
suffering from gome partial disability, to find places in the 



FREE TRADE. 59 

industrial order where they can labor to advantage ; while 
among men of full powers it assigns to each that work which 
is best suited to his individual capacity. 

83. The Territorial Division of Labor.— This is a phrase 
devised by an English economist during the great popular 
agitation which preceded the repeal of the Corn Laws,* to ex- 
press the carrying out of the principle of the division of labor, 
which we have thus far contemplated in operation among the 
individuals of a community, to communities and to nations. The 
phrase intimates that the vast industrial advantages which 
attend the application of that principle within the hamlet and 
throughout the country, will accompany that principle in its 
extension over the whole field of the world's production. 

This is the main, indeed, we may say the sole, economic 
argument in favor of Free Trade, as opposed to what is called 
Protection. The claim to freedom of trade as a "natural 
right " is not one of which the economist can properly take 
account. On the other hand, the arguments of the protec- 
tionist, based on the political importance of the industrial self- 
sufficiency of the nation, and on the alleged social and intel- 
lectual advantages resulting from a diversification of national 
industry, are equally out of his view. 

Inasmuch as the protectionist plea for limiting the terri- 
torial extension of the principle of the division of labor, 
includes a claim that the creation by law of industrial entities 
corresponding to existing political entities, has an influence, 
not only upon the production, but also upon the distribution 
of wealth (which department of our inquiry we have not yet 
reached), and as the whole question of protection or free- 
trade is bound up with political and sociological considera- 
tions, it has seemed best to postpone the remarks we have to 
make upon that question to Part VI, " Some Applications of 
Economic Principles." 

84. The Organization of Industry.— But the advantages 

* Imposing high duties on foreign grain imported into England. These 
laws were repealed by Parliament in 1846, under the leadership of Sir 
Robert Peel. The study of the history of the Repeal movement affords 
an admirable economic exercise. 



60 POLITICAL ECONOMY. 

derived immediately from the division of labor, are but a part 
of the total advantage which is attributable to what we have 
termed the organization of industry. In addition to those 
already indicated, we find, under the larger title, a vast gain 
of productive power resulting from the introduction of the 
principle of competition, the creation of esprit de corps, and 
the direction given to the mass of laborers by the few clear, 
strong spirits, which, under such a system, dominate the 
industrial operations of the community. 

(a) Competition can only be introduced as an active force 
where the opportunity for exact and easy comparison of 
results exists. Where each one of a number of persons is per- 
forming every day a large number of miscellaneous duties, 
now a little of this, then a little of that, it is difficult or impos- 
sible to measure the achievements of the several persons so 
employed, bring them to a scale, and assign credit or blame. 
But when those duties are so distributed that each person is 
charged with the performance of a certain, definite task, com- 
parison becomes possible. 

(b) The creation of esprit de corps within trades and profes- 
sions becomes a tremendous force in industry. Competition 
operates upon the laborer, through the employer's desire to 
get the most out of each workman, and through the laborer's 
desire to obtain and retain employment. The principle now 
invoked operates on the laborer, perhaps not less powerfully, 
through the public sentiment of the craft, establishing stand- 
ards of w ^rkmanship and laws of conduct which tend to lift 
each workman to the level of the best. 

85. (c) Mastership in Industry.— But the most important of 
the sources of gain in productive power, now under consider- 
ation, is found in that mastership of industry which is created 
by the division of labor. That division can not proceed to its 
natural limits without giving rise to the subordination of the 
mass of the laboring population to a select and comparatively 
small body of employers, who assume the responsibilities and 
direct the agencies of production. 

Whether this gain is accomplished at a certain social and 
political cost, is a question the economist is not called upon to 



CAPITAL. 6l 

discuss. That question belongs to the social philosopher or 
the statesman. The economist, as such, is guilty of an unwar- 
rantable presumption if he undertake to measure the quantity 
of economic advantage which would offset the smallest ethical 
or physiological injury. He does all that he is called upon to 
do, all that he can undertake to do without impairing the sci- 
entific value of his results, when he traces causes to their 
effects within the field of economics alone. 

Looking at the matter in its purely economic aspect, it is 
clear that the gain in question is not realized without an initial 
loss, inasmuch as the laborer, under the wages system, neces- 
sarily has a less direct and certain interest in the product of 
his industry, than the man who labors on his own account. 
But this loss is compensated, many times over, by the gain to 
production which results from the impulse and direction given 
to industry by the thought-power and will-power of the ablest 
minds in the community. 



CHAPTER III. 

CAPITAL : ITS ORIGIN AND OFFICE. 

86. The third great agent in the production of wealth is 
Capital. The capital of a community is that part of its wealth 
(excluding land and natural agents, considered as unim- 
proved * ) which is devoted to the production of wealth. 

Some writers, indeed, insist that the climate of a country, 
so far as it especially favors production, is to be reckoned as 
a part of the capital of that country. I prefer to say that 
the beneficent distribution of heat and moisture, by the gratui- 
tous action of nature, is a favorable condition of production, 
but is not capital. A sound system of jurisprudence, which 
secures the impartial administration of justice ; a sound 
organization of the political body, which maintains peace 

* The reason for this exception will appear when we come to treat of 
the rent and price of land. 



62 POLITICAL ECONOMY. 

and order, are most favorable conditions of production ; 
they lead to a vast creation of values ; they are better than 
much capital to the people enjoying them ; but they are not 
capital. 

87. The Origin of Capital. — The origin of capital is so 
familiar that it need not be dwelt upon at length. A simple 
illustration may suffice. Let us take the case of a tribe dwell- 
ing along the shore, and subsisting upon fish caught from the 
rocks which jut into the sea. Summer and winter together, 
good seasons and bad, they derive from this source a scanty 
and precarious subsistence. When the fish are plentiful, the 
people live freely, even gluttonously. When their luck is 
bad, they submit to privations which involve suffering, some- 
times famine. 

Now let us suppose that one of these fishermen, moved by 
a strong desire to better his condition, undertakes to lay by a 
store of fish. Living as closely as will consist with health 
and strength, he denies himself all superfluity, even at the 
height of the season, and by little and little accumulates in 
his hut a considerable quantity of dried food. This is 
wealth. Whether it shall become capital or not depends 
upon the use which is to be made of it.* If destined to be 
merely a reserve against hard times, it remains wealth, but 
does not become capital. 

But our fisherman, in laying by his store of fish, has higher 
designs than to equalize the food consumption of the year. 
As the dull season approaches, he takes all the food he can 
carry and goes into the hills, where he finds trees whose bark 
can be detached by sharp stones. Again and again he returns 
to his work in the hills, while his neighbors are painfully 
striving to keep themselves alive. At the end of the dull 
season he brings down to the water a canoe, so light that it' 
can be borne upon his shoulders, so buoyant that he can pad- 
dle in it out to the " banks," which lie two or three miles from 
shore, where in one day he can get as many fish as he could 
catch from off the rocks in a week. 

* " All labor expended for a distant end falls under the head of capi- 
tal." — Roscher. 



CAPITAL. 63 

88. The Professional Boat-Builder. — The canoe is capital ; 
the fisherman is a capitalist. He can now take his choice of 
three things. He may go out in his canoe and bring home 
supplies of fish which will allow him to marry and rear a 
family in comfort, and with his surplus hire some of his 
neighbors to build him a hut, their women to weave him 
blankets, and their children to bring water from the spring 
and wait upon his family. Secondly, he may let out the 
canoe to some one who will be glad to get the use of it on 
payment of all the fish which one family could fairly con- 
sume, and himself stay at home in complete idleness, basking 
in the sun, and on stormy days seeking refuge in his hut. 
Thirdly, he may let out the canoe and himself turn to advant- 
age the knowledge and experience acquired in its construction 
by making more canoes. 

The last is the course he decides to take. Again and again 
he reappears upon the shore, bringing a new canoe, for the 
use of which a score of his neighbors clamorously compete. 
And later canoes, be it noted, are made with a smaller effort 
and sacrifice on the part of the builder. He has become 
familiar with the groves where the trees are largest and the 
trunks most clear of branches. He has acquired a knack which 
makes it almost a pleasure to strip off the vast rolls of tough 
elastic bark. He never spoils his half -completed work, now, by 
an ill-directed blow. Moreover, his toil is reduced to a mini- 
mum, for he has hired men to carry his burdens and do the 
heavy labor. 

89. The Increase of Capital. — But soon the canoe-builder's 
profits are threatened. Thus far, in the possession of excep- 
tional skill and knowledge, he has been a monopolist, and has 
reaped a monopolist's gains. Now, however, stimulated by 
the sight of such great wealth gathered (that is, so great a 
command of other people's labor acquired) by owe man, others 
begin to enter the field. 

As an essential condition, each must save and accumulate 
enough food to support him while making his first boat, that 
is, must accumulate a certain amount of capital. This, how- 
ever, is less difficult than it was in the case of the original 



64 POLITICAL ECONOMY. 

builder, first, because fish have come, through the multiplica- 
tion of boats, to be much more easily obtained ; secondly, 
because there are fewer experiments to make ; thirdly, because 
certainty and nearness of success will inspire the labors 
of ten men where one will be moved to great sacrifice and 
exertion by a prospect that is distant and doubtful. More- 
over, some of the shrewdest of the assistants of the old boat- 
builder, who have watched him at work, and whom he has 
trusted more and more to do even the nicer parts of his task, 
begin to desert him and to set up for themselves. The rent 
of boats falls rapidly ; the old master, who has become rich 
and self-important, and perhaps a little lazy with years, goes 
out of the business. 

90. First Effects of Competition. — For a time, while the 
number of boats increases rapidly, the quality suffers deteriora- 
tion ; two fishermen are drowned upon the banks by the 
breaking up of boats in a sudden squall. The boat-builders 
in fault are condemned by the general assembly of the tribe 
to support the widows and orphan children. The rage for 
mere cheapness is checked. Boats are now tested before 
they are used, and some ambitious builders find themselves 
driven out of the trade by the failure of their work. 

And it is important to be noted that the profits of boat- 
building are rapidly reduced. The first boat built repaid the 
cost of its construction in a few weeks. The boats now 
made only repay the cost of their construction in the course of 
months. Yet, the men who make boats still get a better 
livelihood than those who use them ; while those who use 
boats get a better livelihood, even after paying the rent, than 
those who still fish off the rocks. 

91. What Will They Do with It ? — Now let us suppose 
that the manufacture of boats has proceeded so far that there 
is one serviceable boat for every four adult males of the tribe. 
At this point, one of. two widely divergent courses may be 
adopted, with very important results to the future of the 
community. 

First, the multiplication of boats goes forward until each 
man is provided with a boat in which he can catch enough 



NEW ECONOMIC WANTS. 65 

fish, in two or three hours a day, to keep him and his family, 
summer and winter, good seasons and bad. The creation of 
capital has at least led to this result : it has put famine out of 
the question. There is always an abundance of fresh fish, on 
the banks, and of cured fish even in the meanest hut. The 
rest of the time is spent in idleness or sport. 

Secondly, the manufacture of boats stops at the point where 
fish for the whole tribe can be provided by one-fourth of its 
members, toiling early and late upon the banks. The remain- 
ing members, those who, through youth or self-indulgence, 
have failed to provide themselves with boats, those who 
through misfortune have lost their boats and have become dis- 
couraged, those who by physical weakness or natural or 
acquired infirmity are least fitted to undertake the rugged 
duty of the fisherman, and those who have been intimidated 
by tales or by experience of hardships, or by the sight of the 
bodies of drowned fishermen rolled ashore after a storm — 
these all betake themselves, in one capacity or another, to the 
service of the fishermen, the capitalist-employers (Par. 304) of 
the tribe. Only so many boat-builders remain as are needed 
to repair and keep up the existing stock. The house-builder 
now takes the place of the boat-builder. No one is satisfied 
to live in the sort of hut which would once have been thought 
good enough for the chief. Menial servants become numer- 
ous. The fashioning of ornaments and trinkets takes up a vast 
amount of labor. 

92. New Economic Desires. — Soon a new want emerges. 
A plant with bright flowers is discovered among the hills and 
brought home as a curiosity. It is raised, as a rather distin- 
guished thing, in front of houses of especial pretension. By 
cultivation it undergoes more or less change, particularly in 
the development of large tubers which are found to be highly 
palatable and nutritious. The absurd name, potatoes, is applied 
to these tubers. As affording a change from the everlasting 
sea-food of the fathers, they are relished greatly, and soon a 
number of persons are breaking up ground to plant and 
cultivate these tubers, which are exchanged, on liberal terms, 
for fish taken on the banks. 



66 POLITICAL ECONOMY. 

The introduction of a vegetable diet marks the beginning 
of a revolution in the life of the community. After this, any- 
thing is possible. The taste for a diversified diet, once felt, 
knows no limits. Agriculture has begun, involving the neces- 
sity of capital in a hundred forms. New foods are followed 
by new fibers ; manufactures spring into being, and all the 
potentiality of the modern nation now resides in a tribe which 
a generation ago lived wholly on fish caught from rocks along 
the shore. 

93. The Law of Capital.— It is not necessary to trace further 
the increase of capital. At every step of its progress, capital 
follows one law. It arises solely out of saving. It stands 
always for self-denial and abstinence. At the first beginning, 
savings are made slowly and painfully ; and the first items of 
capital have a power in exchange (an ability, that is, to com- 
mand the labor of those who have not capital), corresponding 
to the difficulty with which they are secured. The bow, the 
spear, the canoe, the spade, much as they cost, pay for them- 
selves in a few days. Subsequent increments of capital are 
gained at a constantly diminishing sacrifice,* and receive a 
constantly diminishing remuneration, until, in the most 
advanced countries, buildings are erected and machines con- 
structed which only pay for themselves in ten, twelve or even 
twenty years. 

At every stage, we note, too, that capital releases labor 
power which was formerly occupied in providing for the wants 
of the community according to its then prevailing standard of 
living. At every stage, the members of the community make 
their choice, whether they will apply the labor power, thus 
released, to the production of wealth, in other branches, or 
will content themselves with living as well as before, upon 
easier terms, giving up the newly acquired leisure to idleness 
or sport. 

94. Subsistence.— The office of capital has been perhaps abun- 
dantly shown in the account given of its origin. Capital, as 

* Prof. Marshall remarks that the whole continent of Asia, with its 
thousand millions of inhabitants, has less power of saving than England 
has. 



THE LAW OF CAPITAL. 67 

we have seen, is that portion of wealth* which is employed in 
the production of new forms of wealth. 

At first, capital is limited to the means of subsistence for 
the producer. It was not easy in the first stage of industrial 
progress, to lay by enough of the game or the fish of one sea- 
son to last until the next. For want of such a store of food 
many a tribe perished. Many another was kept in a low, 
miserable condition, unable to shift its seat to more promising 
localities, and continually depleted by famine and disease. 
But when once a tribe, by exceptional good fortune, or 
through prudence and self-control, acquired a reserve sufficient 
for a full year's subsistence, it became in a degree master of 
its conditions. It could shift its seat to better hunting or fish- 
ing grounds. It could pursue its avocations systematically 
and economically, doing that which should be esteemed most 
productive in the long run, not, as before, hurriedly and waste- 
fully, under the stress of immediate want. The physical 
strength of its members was kept at the highest point by ample 
and regular diet. 

An ample year's subsistence forms the most important 
advance which a people ever make in their progress towards 
industrial prosperity. No subsequent step costs one-half, or 
a tithe as much. Many peoples never find themselves able 
quite to accomplish this. The people of British India can 
hope for no more, in good years, than to be carried through 
into the next ; while, once in every four or five years, a famine 
following a short crop sweeps away millions by sheer starva- 
tion, or by the fevers which feed upon half -famished popula- 
tions. Even in Ireland, there was known, half a century ago, 
a period two or three months long, preceding harvest, which 
was called by the peasantry "the starving season." 

95. Tools. — The next purpose, in logical, and generally, also, in 
historical order, for which capital is accumulated, is the acqui- 
sition of tools. I use the word here in its largest sense, 
including all apparatus, utensils and machinery. The knife, 
the bow, the spear, the canoe, the net, are the tools of a cer- 

* Excluding land and natural agents, considered as unimproved. 



68 POLITICAL ECONOMY. 

tain stage of industrial society. The spade, the cart, the 
plow, the distaff, the forge, are the tools of a later stage. 
The loom, the lathe, the printing press, the trip-hammer, the 
railroad and the ship, may, with equal propriety, be called 
the tools of to-day. The buildings which protect machinery 
from the weather, and the shops in which trade and manufac- 
tures are carried on, are, in this sense, tools. 

96. Materials. — The third form which capital takes is that 
of Materials. The word, as here used, covers all kinds of 
wealth which are devoted to the production of wealth in any 
other way than as subsistence for the laborer, or as tools to 
increase his power in production. In a primitive state, mate- 
rials play a small part. The bait for the hook among the tribe 
of fishermen ; the corn saved for seed in a planting commun- 
ity, are the most prominent materials of early industry. In a 
later age a large part of all the accumulated wealth of a com- 
munity exists in this form. 

Ultimately, indeed, these materials will be wrought partly 
into tools, partly into the means of subsistence. A part, also, 
may come to be devoted to purposes of luxury or display, and, 
hence, cease to be capital at all. But at any given time, the 
capital of a community may be classed under these three 
heads : Subsistence, Tools, Materials. 

97. The Three Forms of Capital. — In a certain sense these 
three may be resolved into one, Subsistence ; as, indeed, all 
the forms of subsistence itself may be resolved into one, Food. 
Thus, the first simple tools of the barbarous community may 
be said to be exactly represented by the subsistence required 
by the laborers engaged in making the tools. The first mate- 
rials produced by the aid of these tools may be said to be repre- 
sented by the subsistence of the laborers using the tools, added 
to that of the laborers who made the tools. And so of the more 
elaborate tools and the more various and costly materials of 
after ages : all may be said to represent the subsistence of the 
laborer while engaged in the act of production. 

Likewise all the forms of subsistence, food, clothing, shelter 
and fuel, may, in theoiy, be reduced to one, food. The clothing 
of the laborer, for example, represents the food which he con- 



PRODUCTIVE CAPABILITY. 69 

sumed while he was gathering the fibers of the wild grasses 
and weaving them into a blanket. The hut represents the food 
consumed during its erection. The fuel represents the food 
consumed while the laborer was gathering fagots in the forest. 
98. One of the advantages of this classification is, that it 
directs the attention to the part performed by tools, machinery 
and apparatus, in the production of wealth. Look into many 
text books on Political Economy, and you will find capital 
spoken of as if its main, or even its sole office, were to furnish 
subsistence to the laborer. Yet two nations may be equally 
provided with subsistence, while the superiority of one of them 
in the possession of tools may give it a prodigious advantage 
over the other in the power of producing wealth. One man 
with simple tools may do the work of ten men equally well 
fed, but having only their hands to work with. Ten men with 
the wood-working, cotton and wool-working, or metal-work- 
ing machinery of to-day, run by steam or water power, may 
easily do the work of a thousand, with distaff, chisel, saw and 
axe. 



CHAPTER IV. 

THE PEODUCTIVE CAPABILITY OF A COMMUNITY. 

99. We have spoken, in succession, of land power, labor 
power and capital power. The productive capability of any 
community is determined by these three elements, in the 
degrees in which they are severally found to exist there. 

While the land remains in the condition of increasing 
returns (Par. 50), as in the Eastern States of the American 
Union during their earlier history, production may be large, 
per head of population, with but a small amount of capital 
available. Even after cultivation has reached the condition 
of diminishing returns (Par. 51), the energy, intelligence and 
skill of the laboring class, and the thorough organization of 
industry, may wrest a comparatively high rate of produce 
from the reluctant soil ; or, in spite of an ignorant, clumsy 



7° POLITICAL ECONOMY. 

and spiritless population, as in the west of England, the com 
centration of a vast capital upon a naturally rich soil may 
yield large returns, long after the same stage of cultivation 
has been reached. 

100. Where all three conditions are found favorable to pro- 
duction, *. e., fertile lands not yet fully taken up, an intelli- 
gent and energetic laboring population, with abundant capital, 
as in the opening up of parts of our Western States within the 
last thirty years, and notably in the development of Minnesota 
and Dakota now going on, the rate at which wealth grows 
appears almost fabulous. Surely, inevitably, however, the 
increase of population will bring about the condition when an 
increasing labor power and capital power must struggle with 
a decreasing capability of the soil. Mechanical inventions, 
chemical discoveries, may long postpone the diminution of the 
per-capita product ; all improvements in the industrial char- 
acter of the working classes, or in the organization of labor, 
enable a larger population to be supported without reduction 
in the quality of their subsistence ; but not the less is the 
power of one of the factors of production steadily on the 
decline. 

This principle applies, be it observed, only to the per-cap- 
ita product. The absolute quantity produced increases con- 
stantly with every increment of labor or capital judiciously 
applied to the land. There never comes a time when more 
laborers will not produce larger harvests. There never comes 
a time when additional capital introduced into agriculture 
cannot secure for itself some return. 

101. Such is the condition under which the earth is culti- 
vated by human labor, for the supply of human wants. The 
production of wealth by mechanical processes is, however, as 
we have seen (Par. 53.), subject to this condition only so far 
as relates to the materials employed in manufactures, all of 
which are derived from agriculture. The mechanical pro- 
cesses themselves are subject to no such drawback. On 
the contrary, the increase of population for a considerable 
period allows the division of labor to take place more fully, 
with the result of enlarged production. Hence the multipli- 



PRODUCTIVE CAPABILITY, 7 1 

cation and diversification of conveniences and refinements, 
so far as they involve no increase in the amount of material 
consumed, may be carried forward literally without limit.* 
Labor and capital here act with prodigious force, not, as we 
might say, by addition, but by multiplication, each step ren- 
dering every successive step easier, as the force of habit and 
invention give to production a constantly accelerating rate of 
movement. 

102. Productive Capability not fully Realized. — Produc- 
tive capability being thus determined by the three elements 
which have been stated, the greatest question which the econ- 
omist has to answer, the most difficult, the most important 
question in economics, is, why the actual production of wealth 
falls so far short of its productive capability. But this is a ques- 
tion which cannot be finally answered till the reader has been 
taken through all the departments, by turns, of economic 
science. It is not until the economist reaches the department 
of consumption, that he can show how the use which is made 
of wealth may waste the capital power of a community, 
or may impair its labor power through the effects of vicious 
indulgence upon muscular strength and upon the will of 
the laborer. In the department of distribution, again, we 
shall see how the division of the product of industry, 
among the several persons and classes of persons engaged, 
may work great and permanent injury to those who are 
at disadvantage in making their claim ; and how disputes and 
contests over that division may seriously reduce the amount to 
be divided. In the department of exchange, the economist 
meets the question in a special form, namely, what is the 
cause of those occasional stoppages of production which 
are known as crises, or " hard times," when the wheels of 
industry move with painful slowness, and the wealth which 
has been gathered in preceding periods is wasted in an inact- 
ivity from which all classes suffer, and yet for which no one 
seems accountable, since all are, or profess to be, ready and 

* The important mistake committed by Mr. Henry George, through 
overlooking this point, will be indicated in Par. 515-7. 



72 POLITICAL ECONOMY. 

desirous to work. Under each of these titles, thus, we shall 
find something by which to explain the phenomenon that the 
actual production of every commercial and manufacturing 
country, taking a term of years together, falls far below the 
possible production. 

103. Industrial Structure — Even under the present title, 
we have to note a liability which besets the productive power of 
a community arising from what we may term its industrial 
structure. By this term is intended that organization of the 
capital power and the labor power of a community, which 
makes the productive capability of the whole depend, in a 
greater or less degree, upon the character of individuals or 
classes of individuals, and, in consequence, upon accidents 
affecting the fortunes of such individuals or classes. This is 
a matter far too little regarded in reasoning about the wealth 
of nations and communities. Writers in economics are apt to 
speak of the labor power and the capital power of a commun- 
ity as if they were aggregates of pure force. No reference 
is made to structural organization. Complete homogeneity 
and the highest mobility are assumed for the whole labor- 
mass and the whole capital-mass. 

In such a way of looking at the subject we lose sight of 
the possibilities of great loss to production arising out 
of two conditions. 

104- (a) Partial Immobility of Capital and Labor. — In all 
advanced industrial societies, labor and capital become com- 
mitted to certain courses, from which they can only depart 
after much delay, against great resistance, at heavy cost. We 
have seen how vast is the increase in productive power caused 
by the division of labor, the differentiation of industrial func- 
tions, the specialization and localization of trades and the 
organization of the productive forces. 

Precisely according to the chances of gain resulting here- 
from, is the risk of loss, in the case of mistake or misadvent- 
ure. The artisan who has learned a trade becomes compara- 
tively helpless if the opportunities for working at that trade 
are taken away. The factory hand who has learned to per- 
form only one operation out of the multitude that go to the 



MISDIRECTION OF FORCE. 73 

spinning of a single yard of cloth, can do little if he be thrown 
out of the place where that operation is to be performed in 
immediate connection with all the others. In theory, the 
artisan or the factory hand may turn to some other field of 
production, and soon acquire the knowledge and the manual 
skill required in some new art or trade. The observation of 
large populations, through long periods, shows that such read- 
justments of specialized labor demand more energy and more 
enterprise than are possessed by most laborers, occupy a great 
deal of time, at the best, and involve no small waste of labor 
power. 

Not infrequently that readjustment is not fully accomplished 
in the generation that first feels the necessity for it. The 
population or class of laborers upon whom this demand is 
made, prove unequal to the task, lose hopefulness, courage 
and self-respect, and by a slow decline sink into pauperism, 
squalor, vagabondage and vice, too often transmitting tainted 
blood and tainted minds to the generation that follows. 

105. (b) Misdirection of Labor and Capital.— Capital power 
and, in perhaps a greater degree, labor power are in the hands 
of individuals whose peculiarities of character, of habitude, 
of station, seriously modify the application of capital and 
labor to production ; whose mistaken aims, whose erroneous 
impulses, may divert these forces from the object which we 
have supposed them to be seeking with an unremitting and 
an unmistaking attraction ; whose accidents of fortune may 
impair the energy of the industrial movement, or for a time 
arrest it completely. 

The most familiar illustration we could use is that of a fac- 
tory whose master has suddenly died. The labor power 
remains ; the capital power remains ; but the spring that set 
them in motion is broken. It may happen that a son, or a 
partner, of equal ability, will at once step forward and take 
up the burden that has fallen from the nerveless hands. It 
may be, on the other hand, that a long period of embarrass- 
ment will result, during which labor and capital will stand 
idle. Perhaps the loss will never be made good. An incom- 
petent person succeeds by right of relationship. Bad manage- 



74 POLITICAL ECONOMY. 

ment dissipates both the accumulated wealth and the reputa- 
tion of the establishment. After a dreary struggle, the stock 
and fixtures are sold, the factory is dismantled, and the opera- 
tives go forth to find employment elsewhere as they may. 
There is many a thriving town in New England, whose only 
reason for growth, through fifty years, from small beginnings, 
has been found in the accident of the birth there, and the long 
life, of a single energetic, able, careful man of business. 
There is many a " deserted village " whose decay dates from 
the sickness or death of one man, out of the many hundreds 
who thronged its streets. 

So difficult is the control and direction of capital and labor, 
that a distinct class is called into being, in all industrially 
advanced communities, to undertake that function. This 
class is known as the employing class, or, to adopt a word from 
the French, the entrepreneur class. 

106. The Entrepreneur Class. — Mastership is essential to 
a large and varied production. The industrial enterprises of 
the civilized states could not have been brought to their pres- 
ent height without mastership, and could not be maintained at 
that height one year without it. Whatever may be true of 
politics, the industry of the world is not tending toward 
democracy, but in the opposite direction. 

In its first stages, the division of labor does not necessarily 
imply the introduction of the master-class. When the forms 
of production are few ; when materials are simple ; when only 
hand-tools are used ; when each artisan working at his bench 
makes the whole of the article to be marketed ; when styles 
are standard, and the consumers of the product are found in 
the immediate neighborhood, the need of the master is not 
felt. But when the hand-loom gives way to the power-loom ; 
when the giant factory absorbs a thousand petty shops ; when 
many persons, of all degrees of skill and strength, contribute 
to a result which perhaps not one of them comprehends per- 
fectly or at all ; when machinery is introduced which deals 
with the gauzy fabric more delicately than the human hand, 
and crushes stone and iron with the force of lightning ; when 
costly materials require to be brought from the four quarters 



THE ENTREPRENEUR. 75 

of the globe, and the products are distributed by the agen- 
cies of commerce through every land ; when fashion enters, 
demanding incessant changes in form or substance to meet the 
caprices of the market, then the master becomes a necessity of 
the situation. 

His work is not alone to enforce discipline through the body 
of laborers thus brought under one roof ; not alone to organ- 
ize these parts into a whole and keep every part in its place, 
at its proper work ; not alone to furnish technical skill, and 
exercise a general care of the vast property involved. Be- 
yond these and far more than these, he is called upon to 
assume the responsibilities of production ; to decide what 
shall be made, after what patterns, in what quantities, at what 
times ; to whom the product shall be sold, at what prices, and 
on what terms of payment. The armies of industry can no 
more be raised, equipped, held together, moved and engaged, 
without their commanders, than can the armies of war. 

107. Those conditions of production which bring to the 
laborer the necessity of finding a master under whom he can 
work, bring to the man of superior abilities and acquh'ements 
the opportunity to employ his powers for the greatest econo- 
mic advantage of society and for the greatest profit to himself. 
In a community where division of labor has proceeded but a 
little way, the man of intellect moves but one pair of arms. 
In a highly organized industrial system, he moves a thousand. 

One man who has the genius to plan finds a host of helpers, 
each of whom can execute his schemes nearly if not quite as 
well as he himself individually could, who yet would have 
been wholly helpless and amazed in the presence of the exi- 
gencies, the difficulties, the dangers, which only arouse the 
spirit of the master, stimulate his faculties, and afford him the 
keenest zest of enjoyment. 

108. Whether we regard this as the ideal state or not, 
whether we rejoice or repine at the extension of the principle 
of mastership in industry, it is the most characteristic fact of 
the industrial system of to-day. It is likely to gain rather 
than to lose importance in the years to come. 

During the great moral and political fermentation, which 



7& POLITICAL ECONOMY. 

brought on the Revolution of 1848, the attention of social 
reformers in France was called to the possible benefits of Co- 
operation, being an industrial system in which mastership 
should disappear. Not a few of the English economists, and, 
following them, American economists generally, have been led 
to take up co-operation as a practicable scheme, which only 
needs to be tried in order to work the most beneficent results. 

So far from it being true that the abolition of mastership is 
at present feasible,* there never was a time when the distance 
between the man and the master was so wide as it is to-day. 
Nay, the distance between the mere superintendent, or over- 
seer, on the one hand, who thoroughly understands the techni- 
calities of production, and has all the ability required for exe- 
cuting orders, for enforcing discipline among the working force, 
and for keeping the machinery of the mill smoothly running, 
and the real master, the organizer and energizer, on the other, is 
greater to-day than it ever was before. That distance, so far 
as I can judge, tends continually to increase. The possibili- 
ties of gain or of loss were never so great as now. The 
choices and decisions essential to the conduct of business were 
never so frequent or so difficult. The difference in the prod- 
uct, which results from the difference between the able and 
the inferior management of affairs, was never so great. The 
toleration offered to the commonplace in industry was never 
so small. 

109. Possibilities of Industrial Damage Involved in the 
Entrepreneur System. — While the entrepreneur system is, 
thus, an agency of the highest efficiency in increasing the pro- 
ductive power of a community ; becomes, indeed, the condi- 
tion without which the industrial enterprises of modern society 
could not exist, it will be seen that it involves the possibility 
of industrial disasters commensurate with the forces it sets 
in motion. Just as the accidents of the railway are more 

* I speak here of industry as a whole, and especially of the largest 
branches, supplying general markets. When we come to speak of 
Industrial Co-operation, in Part VI, I shall note certain possible excep- 
tions, in the case of smaller branches of industry supplying narrower 
markets. 



LOSS OF PRODUCTIVE FORCE. 77 

destructive and fearful than those of the wagon road, so do 
the catastrophes of modern production exceed, in their wreck 
of fortune and waste of capital, all that is possible under the 
less ambitious organization of productive agencies. The mis- 
takes of the man who controls a 1 thousand workmen are multi- 
plied a thousand fold. 

And those mistakes will not be infrequent. While the 
entrepreneur class in any community consists generally of 
strong men, that class contains many persons who by the acci- 
dent of fortune have come into the control of the agencies of 
production without the necessaiy qualifications, and who 
habitually mismanage and misdirect these agencies, to the 
lowering of the general scale of productiveness in the com- 
munity. Moreover, the ablest men of business themselves fall 
far short of the ideal standard. Not to speak of intellectual 
failings, infirmities of the will are such as to make it a mat- 
ter of course that no small part of the industrial power placed 
in the hands of the entrepreneur class will be misdirected. 
The perfect temper of business is found in few men : oscilla- 
tions between recklessness, on the one hand, and over-cautious- 
ness, on the other, constitute the rule, while absolute self -poise 
is the rare exception. In paragraphs 313 to 314, are indicated 
certain causes which tend to multiply the proportion of 
incompetent employers. 

110. Destruction of "Wealth. — Another cause which re- 
quires to be mentioned, as in a degree accounting for the fail- 
iire of industrial society to accumulate wealth and maintain a 
productive capability corresponding to the theoretical efficiency 
of the three primary agents of production, land, labor, and 
capital, is the actual destruction of wealth by accident or con- 
vulsions of nature. The losses by fire, alone, in the United 
States probably exceed a hundred millions of dollars a year, 
if structures only are considered ; while were we to add the 
damage to crops and forests, the sum of wealth consumed by 
this fearful agent would be greatly increased. Hurricanes, 
and storms, and floods, and accidents by rail, annually waste 
and destroy no inconsiderable portion of the products of human 
skill and toil. 



PART III.— EXCHANGE. 



CHAPTER L 

THE THEORY OF VALUE. 

111. Exchange as a Department of Political Economy. — 
We have seen that there is a tendency among recent writers 
to abolish the familiar departments of political economy, sev- 
erally known as production, exchange, distribution and con- 
sumption, as interfering unduly with the simplicity and 
perhaps with the dignity of the science they have chosen to 
cultivate. Even of those who have retained certain of these 
titles, there is a general consent at least to abandon exchange, 
as a department of political economy.* 

I am disposed to think that this general abandonment of 
exchange, as a distinct title in political economy, is due to a 
confusion of exchange with trade or commerce, viewed as 
productive agencies. It is seen that the most of what is done 
in trade or commerce pertains to the production of wealth. 
The labor employed in packing or baling goods, in transport- 
ing them to market, in opening and exposing them for sale, is 
engaged in the production of wealth, equally with that 
employed in raising the raw materials from the ground, or 
fashioning them into merchantable shapes. Values are created 
as truly in the one case as in the other. Even the labor of the 
clerks and salesmen is productive labor as much as that of the 
artisan or the agriculturist. The horses and wagons, the 
locomotives and cars, the shops and warehouses, of trade and 
commerce are strictly productive agencies. 

* To this Mr. Mill forms a conspicuous exception. He makes exchange, 
as distinguished from production and from distribution, the subject of 
one of the books of his Political Economy. 



THE RATIOS OF EXCHANGE. 79 

What is it, then, that need be considered under the title, 
exchange ? What is left, after production has been fully 
treated ? Why should this department of political economy 
be retained ? 

Under the title, exchange, in a systematic treatise on politi- 
cal economy, I would consider the Ratios of Exchange, the 
terms on which goods, commodities, articles possessing value, 
items in the sum of wealth, exchange for one another. We 
are here called to answer the question : Why does so much 
of this commodity exchange for so much of that? Why not 
for more ? Why not for less ? 

Such a question, it appears to me, can best be treated apart 
from the exposition of the physical conditions under which 
wealth is produced (as, for instance, the efficiency of the divi- 
sion of labor, or the diminishing productiveness of land); 
apart from the discussion of the forces by which the product 
of industry is distributed in wages, interest, profits, rent ; 
apart, also, from the question, what effects upon the future 
production of wealth will be wrought by giving one direction, 
or another, to the consumption of the existing body of wealth. 
112. Exchange Arises out of the Division of Labor. — 
The occasion for exchange arises out of the division of labor. 
Were all persons engaged in the same productive avocations, 
there would be no inducement to exchange. To barter fish 
for fish, or bread for bread, would be simply a waste of time 
and energy. It is because men first divide in production that 
they afterward unite in exchange. It would be easy to con- 
ceive a community in which each producer should be engaged 
in precisely the same work as every other, each raising from 
the ground or making by the labor of his hands all that he 
were to eat, drink or wear. In such a situation, all that has 
been said of the causes of the varying efficiency of individual 
laborers would hold good ; all that has been said concerning 
" diminishing returns in agriculture," all that has been said of 
the origin and office of capital, would still hold good. But 
there would be no actual exchange, because there would be no 
division of labor. 

Let, however, the production of the individuals of a com- 



\ 



80 POLITICAL ECONOMY. 

raunity be varied by ever so little, the occasion for exchange 
will arise. If one agriculturist raise wheat, another rye, an- 
other potatoes; and if others raise, some cattle, some sheep, 
some swine, the products will soon begin to be exchanged. 
Then the question will arise, how much wheat shall be given 
for a bushel of rye or potatoes; how many sheep or swine for 
an ox? 

Let the principle of the division of labor be carried further, 
until a score or a hundred of mechanical arts and trades and 
half a dozen learned professions come to be recognized, and 
the occasions for exchange will rapidly extend to a large part 
of the entire production of the community. The farmer may 
still consume a half * of his own corn and beef and potatoes, 
but the smith will scarcely consume the product of his own 
labor for three days in the year; the boot-maker will be con- 
tent with one out of fifty pairs of boots he makes in the same 
time ; the physician will probably take none of his own medi- 
cines. 

113. An Exchanging Class.— And it will result, either that 
these persons, having occasion to exchange their products for 
those of others, will have to give up an appreciable portion of 
their time to making those exchanges in person, or else, the 
work of making exchanges will become the subject matter of 
a new profession or avocation. 

If the smith can in one day make as many horseshoes as 
the farmer could in ten ; and if the farmer can in one day do 
as much in raising wheat as the smith could in two or three, 
it is evident that the peddler or shopkeeper who enables the 
farmer to keep steadily at work raising wheat and yet have 
shoes for his horses, and the smith to keep making shoes and 

* In England, says Prof. Roscher, it is 38.8 per cent, of the supply 
that comes to the market ; in Belgium, 40 ; in Saxony, at least 50 per 
cent. In Germany, the farmers consume on an average, two-thirds them- 
selves. 

The ratio between the portion of the crop marketed and the portion 
consumed at home, is, of course, not the same for any two countries,, or 
for the same country, at any two dates. It is continually changing witb 
changes in the habits of living among the people, with changes in the 
facilities of transportation, etc. 



WHAT IS VALUE? 81 

nothing else, and yet have bread to live upon, is a productive 
agent as truly as smith or farmer. 

Just as the division of labor between the individuals of a 
community gives rise to exchange, so the extension of the 
same principle to the communities of any country, or still fur- 
ther, to all the countries of the world, creates new occasions 
for exchange and rapidly multiplies the objects to be ex- 
changed. In all these successive cases the agencies by which 
exchanges are effected : the labor of the men engaged in trade 
or transportation ; the horses and wagons, the steam-cars 
and ships ; the services of the clerks who write orders for 
goods and keep account of sales and payments, of the bankers 
who advance the requisite capital or remit the proceeds of 
commercial ventures, even of the shipping reporters and finan- 
cial editors who supply the information upon which merchants 
and bankers alike must act, all these agencies are as truly pro- 
ductive of wealth as the labor of mechanics or miners or agri- 
culturists, and are to be treated under the title, production. 

We have, under the title exchange, only to investigate the 
principles which determine that so many dozens of wood 
screws made in Providence or so many pounds of horseshoe 
nails made in Troy, shall purchase so much of the wheat of 
Illinois, the tobacco of Kentucky, the sugar or molasses of 
Cuba, the tea of China. 

114. Value.— Whence comes this power-in-exchange? What 
are its conditions, and what its limitations ? 

We have defined value as the power which an article con- 
fers upon its possessor, irrespective of legal authority or per- 
sonal sentiments, of commanding, in exchange for itself, the 
labor, or the products of the labor, of others. 

But let us go further, and inquire how it is that one article 
confers on its possessor such a power, while another does not; 
why it is that, of two articles of value, one confers the power 
of commanding the labor of others for weeks or years, while 
another is parted with for the service of a day or an hour. 

115. Value and Price.— But, first, let us introduce a term, 
the use of which is not absolutely necessary at this point, but 
which will, nevertheless, save much circumlocution, and per- 



82 POLITICAL ECONOMY. 

haps avoid a liability to misunderstanding — that term is Price. 
Value is, briefly speaking, purchasing power, or power in ex- 
change. Price is purchasing power expressed in terms of 
some one article ; power-in-exchange-for-that-article, be the 
same wheat, or beef, or wool, or gold, or silver. In common 
speech the word price brings up the idea of money- value, the 
purchasing power of an article expressed in terms of money. 
Yet it is equally correct to say that the price of a horse is 
seventy-five bushels of wheat, as to say that it is one hundred 
dollars. Inasmuch as we have not yet introduced the money 
function into our discussion, the word price, throughout the 
present chapter, will be understood in its more general sense, 
as the purchasing power of a commodity expressed in terms 
of some other article. 

116. Distinction between Value and Utility.— In setting 
out upon our search for the law of value, a distinction of great 
importance requires to be made. Value must be severely dis- 
tinguished from utility. Many economists of merit have 
stumbled at this point. Even of those who have observed the 
distinction between the two conceptions, some have resorted 
to unfortunate terms for their characterization, and have 
written of value in use and value in exchange. Now, value 
in use is utility, and nothing else, and in political economy 
should be called by that name and no other. Value is power- 
in-exchange, and, therefore, the term value-in-exchange is seen 
to be a bad one, at once clumsy and misleading. 

Nor must it be thought that value and utility have any such 
necessary and constant relation to each other that one may 
safely be used for the other. On the contrary, an article may 
have the highest conceivable utility, yet no value. 

The utility of atmospheric air is inexpressible. Atmospheric 
air has usually no value, because it is supplied naturally, in 
such abundance that any one can have as much of it as he has 
occasion to use without giving for it either his labor or the 
products of his labor. Even atmospheric air may, however, 
acquire value and be sold at a regular, definite price, so much 
per cubic foot, as when delivered through pipes to a diver 
beneath the surface of the ocean. 



WHAT IS UTILITY? 83 

The utility of water is also beyond expression, yet ordinarily 
water has no value. In cities, however, water is delivered to 
householders at fixed rates, supposed to represent the cost of 
the service by which the fluid is stored, conducted and deliv- 
ered. Water, though ordinarily to be had gratuitously, may 
thus acquire value. On the other hand, something may even 
be paid for merely getting rid of it. A party may enter into 
a contract for pumping it out of a mine, or a swamp, or a 
cellar, at so much a gallon. A much higher price is often paid 
for removing the fluid from the place where it is not wanted, 
than is commonly paid for bringing it to the place where it is 
wanted. 

But while utility and value must not, in economic reason- 
ing, be used interchangeably, as they so often are in ordinary 
speech, utility is everywhere one of the elements of value. It 
is always present, where value is present. It can not be assumed 
that a man will give his labor or the products of his labor for 
that for which he has no use. 

117. Useful does not mean Beneficial. — It needs to be 
observed that the utility of which the economist speaks is not 
always the utility recognized by the moral philosopher or the 
physiologist. By that term the economist signifies only that 
an article answers a felt human want ; that men have a use 
for it. 

The appetite from which that sense of want arises may be 
vicious, the object itself may be prejudicial, even pernicious. 
Intoxicating liquors are, in their main uses, injurious to body 
and to mind ; but so long as men want them, they have utility, 
in the economic sense. So long as men want them and can 
only get them by giving something for them, they have also 
value. Nay, the prussic acid which a desponding wretch buys 
of the druggist has its value as truly as the medicine which a 
father buys to save his child's life, and has its utility, in the 
economic sense, as well. 

118. Is Value aMomentary Phenomenon P— We say, value 
is power-in-exchange. Some writers, using this definition, have 
proceeded to argue that value is a momentary phenomenon, 
beginning and closing with the act of exchange, and that an 



84 POLITICAL ECONOMY. 

article has value only when it is exchanged ; only while it is 
exchanging. 

Is not this to confound our knowledge of a thing with the thing 
itself ? A man owning an article can not know precisely what 
it is worth until he comes to exchange it. But it may all the 
time be beyond the possibility of doubt that the article 
has purchasing power ; it would bring something in an 
exchange. 

One owns a house in New York. He can not know at any 
given time, without resort t© an actual exchange, what its 
value is, since value is power-in-exchange, and to an exchange, 
as to a quarrel, there must be two parties. The owner's per- 
sonal estimate does not fix the value, which may prove much 
below that estimate. But while the owner may not know 
what is its power-in-exchange, there may be no room for 
doubt that it has such power. If it would not sell for $30,000, 
his estimate, it would bring $10,000 in any conceivable state 
of the market ; but if it only brought $5,000, or $5, it would 
have value. 

A farmer in Illinois has 1,000 bushels of wheat, and sells 
500 bushels at $1.50. He knows that the remaining 500 
bushels have value ; but, just what that value is, he can not 
know. That the wheat would go off at some price, is beyond 
question ; but it might take a considerable reduction, say to 
$1.45 or $1.40 to carry it off ; or, on the other hand, a change 
in the market might put the price up to $1.55. 

There are, indeed, circumstances where a man may not be 
able to know that an article in his possession has value unless 
he actually finds a purchaser for it. These are cases where 
the value of an article is, at the best, low ; or where the uses 
of an article are few, and the demand for it spasmodic and 
intermittent. But to say that value is a momentary phenom- 
enon, only emerging in the presence of a purchaser, and 
remaining only during the consummation of a bargain, seems 
much like saying that a body has weight only while some one 
is lifting it. 

119. What is the Helation of Labor to Value ?— We have 
said that value is the power which an article confers upon its 



VALUE AND LABOR. 85 

possessor, irrespective of legal authority or personal senti- 
ments, to command in exchange for itself the labor, or the 
products of the labor, of others. 

Does that power arise solely and necessarily from the fact 
that labor has been bestowed upon the production of that 
article ? No. It is true that men do not commonly give 
labor for that which has not cost labor ; and that, on the 
whole, and in the long run, the respective values of a number 
of articles will, at least in the same community,* be nearly 
according to the amounts of labor that have been expended 
upon them, severally. But it is not because an article has cost 
labor that it possesses value. That is because it can not now 
be obtained without labor. In any given instance it is not 
necessary that a thing, to have value, should itself have cost 
labor in any degree ; while it is not at all uncommon to find 
an article having a value equal to that of another article 
which cost twice as much labor as itself. 

120. Prof. Senior's Statement. — Prof. Senior remarks: 
" Any other cause limiting supply, is just as efficient a cause 
of value in an article, as the necessity of labor to its produc- 
tion. And, in fact, if all the commodities used by man were 
supplied by nature without any intervention whatever of 
human labor, but were supplied in precisely the same quanti- 
ties as they now are, there is no reason to suppose that they 
would either cease to be valuable, or would exchange in any 
other than their present proportions." 

Prof. Senior elsewhere inquires : " Suppose meteoric iron 
were the only form in which that metal were produced, would 
not the iron supplied from heaven be far more valuable than 
any existing metal ? " 

121. Here is an autograph of John Milton. The lines may 
have been written to a friend, or from a mere freak of fancy, 
or to occupy an idle moment. Labor, in the economic sense, 
there was none. Yet the autograph may be worth $20 ; that 
is, may command for its possessor the labor of a skilled work- 

* The significance of this qualification will be seen when we come to 
speak of International Exchanges, in the following chapter. 



86 POLITICAL ECONOMY. 

man for ten days, of ten working hours each. Here is a high 
degree of value (that is, command of the labor of others) 
where yet no labor has been. The explanation is found in the 
fact that Milton is dead, and his remaining autographs are 
few, while many people want them, and want them very much. 
This is an instance of what may be called " monopoly- 
value," or as some prefer to call it, scarcity-value. The value 
here is altogether irrespective of the amount of labor expended 
upon the production of the article, simply because the article 
can not be reproduced, or the stock of it replaced by labor. 

122, Cost of Production, or of Reproduction. — Again, 
take the case of an article which, by reason of the discovery 
of new fields of the raw material, or of some mechanical inven- 
tion, can now be produced with the expenditure of half as 
much labor as formerly. Will the value of the stock of such 
goods on hand be influenced by the original cost of producing 
them ? Not at all. They will exchange for other products 
on the same terms as the goods brought into the market under 
the new conditions. 

In the same way, if the amount of labor required for the 
production of this kind of goods should suddenly increase, 
from the diminution of the supply of materials, or other cause, 
the stock on hand would acquire a higher value, corresponding 
to the cost of bringing in new goods of the same quality. 

Hence, in respect to all goods which can be produced, or 
the supply of which can be replaced, within the time during 
which those who want them are willing to wait for them, we 
say that value is determined not so much by the cost of pro- 
duction as by the cost of reproduction. They are exchanged 
for the products of others, not necessarily in proportion to the 
amount of labor they actually required, but, rather, according 
to the amount of labor which would now replace the stock. 

123. Time an Element. — I said, "within the time during 
which those who want them are willing to wait for them." 
The fact that goods can not be reproduced, or the stock of 
them renewed, without a certain delay, may, for a time, con- 
fer a monopoly-value on the existing stock. Thus, if the sup- 
ply of food in a city had nearly failed, the fact that an 



DEMAND AND SUPPLY. 87 

abundance were certain to arrive in two weeks would have 
little or no effect on the value of the scanty store remaining. 
Men can not wait two weeks for food. They must have it at 
once. In their urgent necessity, they will exchange their labor, 
or the products of their labor, for continually smaller 
quantities of meat and bread, up to the very moment that the 
ships which bear the new supplies drop anchor in the harbor. 

124. It is not Always the Cost of Reproduction, — But 
while, as between the cost of production and the cost of 
reproduction, it is the latter, and not the former, which deter- 
mines the power an article shall have in exchange ; it is not 
true that value is always determined by cost of reproduction. 
It may be, in regard to any given commodity, at any given 
time, that the cost of reproducing it would be greater, even 
far greater, than the price at which it sells. How can this be ? 
I answer that this might occur through a diminution in the 
occasions for the use of that article. 

Two generations ago, every decent family possessed a 
spinning-wheel, and spinning-wheels then bore a price fairly 
proportioned, we may suppose, to the cost of their production 
with the tools and materials then available. A little later, 
when it ceased to be customary to wear homespun, spinning- 
wheels may be said to have had no value at all. They were 
banished to attics, or turned into playthings for children, and 
quickly smashed to pieces. To-day, a fashion has come in, by 
which the spinning-wheel becomes the companion of the dado, 
aesthetic furniture, and Queen Anne windows ; and a well- 
preserved and authentic specimen is worth more than the sum 
at which a good reproduction could be made and sold. 

125. Demand and Supply. — If neither cost of production 
nor cost of reproduction determines the power which an arti- 
cle shall have in exchange, is there any principle of universal 
application on which value rests ? I reply, yes : Value 
depends always and wholly on the relation between demand 
and supply. 

These terms require to be defined. It will not answer to 
trust to the ideas which the words of themselves call up in the 
mind of the reader. Demand and supply alike hare refer- 



88 POLITICAL ECONOMY. 

ence (1) to a certain article, and (2) to a certain price. In 
the economic sense, demand means the quantity of a given 
article which would be taken at a given price. Supply means 
the quantity of that article which could be had at that price. 
Neither of these two elements of demand and supply must 
be omitted. From the neglect of one of them by many econ- 
omists great confusion has arisen. Nearly all writers have 
seen that demand must have reference to a certain article, be 
it wheat, or potatoes, or iron, or wool, or something else in 
particular ; that there is no such a thing as a demand indis- 
criminately for meat, potatoes, iron, wool, and all other articles 
in the market. In the same way it is seen that the word supply 
has no significance unless some one article is in view. It has 
not, however, been so clearly apprehended and strongly held 
in mind, that jdemand and supply both have reference to, a 
certain price. 

126. Desire is not Demand. — It has been said that demand 
means the quantity of any seated article Avhich would be taken 
at a stated price. Demand can possibty come only from 
those who could give the price. So we see that desire is not 
demand. As Mr. Thornton says, there is no demand, econom- 
ically speaking, in the hungry eyes of a penniless boy, looking 
at tarts through a pastry-cook's window. Without pennies, 
an unlimited longing and capacity for their consumption 
would not enable that boy to contribute aught to the demand 
for tarts. 

127. Reduction of Supply. — Let us illustrate the applica- 
tion of the terms demand and supply in economics. 

We will take the case of an island far out at sea, inhabited 
by a population mainly engaged in fishing and agriculture, 
having, on one side, a beach which is strewn with vast depos- 
its of seaweed, which has been found to be a very good dress- 
ing, or manure, for the cultivated fields of the island. A 
hundred of the islanders are accustomed to get out the 
seaweed, in intervals of fishing or of cultivating their own 
little properties, selling it to the farmers inland. 

We may suppose that this manure is found to increase the 
yield of the lands to which it is applied to such an extent that 



DEMAND AND SUPPLY. 89 

there are a thousand farmers who will each give ten bushels 
of wheat, this year, for five loads of seaweed. There is, then, 
a demand for five thousand loads at the price of two bushels 
of wheat per load. Now the supply — that is, the amount 
offered, or ready to be offered, at this price — may be greater 
or less than five thousand loads. It may be that the catch of 
fish along the shore is so abundant this season that all those 
who are accustomed to get out the seaweed find they can obtain 
more by fishing. There may, then, be no supply whatever, at 
this price. And it may happen that there will be no demand 
for seaweed at any higher price. The farmers may be agreed 
in believing that, what with the labor of applying the manure, 
and what with the necessity for paying for it months before 
the harvest, seaweed is not worth to any man more than two 
bushels of wheat. In this case, none of this article will be 
gathered, and the supply will be nil. 

2d. It may happen that, in spite of the superior attractions 
of fishing, this season, a certain number of those who habitu- 
ally gather the seaweed may continue to do so, some because 
of the force of habit ; some because they know that the per- 
sons whom they have been accustomed to supply will look to 
them for it ; some because their boats and nets are out of 
repair ; some because of sickness in their families, indisposing 
them to go far from home. So that it may result that a 
thousand loads will be gathered. This may all be sold at two 
bushels of wheat per load. 

Those who buy may be those who have usually bought of 
the persons who now have to sell, and this may be the sole or 
the determining reason why the seaweed is sold to them, and 
not to others ; or they may be those whose farms lie nearest to 
the shore, and hence are first reached by the carts laden with 
the manure ; or they may be those who " spoke first " for sea- 
weed, early in the season. Any one of a number of reasons 
may control the selection of the persons who shall receive the 
thousand loads, out of the larger number who formerly pur- 
chased five thousand loads. And this, it will be observed, 
occurs without raising the price of seaweed, although the 
amount gathered has been greatly reduced. 



9° POLITICAL ECONOMY. 

3d. Again, it may happen that among the former purchasers 
of the seaweed will be found a considerable number of 
farmers, wanting in the aggregate 2500 loads, who esteem 
that article as worth more to them, per load, than two bushels 
of wheat ; and, finding that it can not be had for the usual 
price, these may begin to offer, first, a quarter and, then, a half 
bushel more, in order to secure each the amount required by 
his own land. 

Who, out of the former class of purchasers, shall be so dis- 
posed, may be determined by any one, or more, of several 
causes. It may be wont, it may be fancy, it may be obsti- 
nacy, or, it may be that their lands are of a nature peculiarly 
to need such dressing, and to respond with more than ordinary 
liberality to this expenditure in their behalf. This demand 
for seaweed may be found strong and persistent enough to fix 
the price at two and a half bushels of wheat, per load ; and at 
this price enough of the fishermen may be induced to give up 
their fishing ventures to procure the required amount of 2500 
loads. 

128. Increased Supply. — We have given three cases where 
a reduction in the supply of seaweed brings up the question 
whether the demand shall prove sufficient to raise the price. 
Let us take successively a few cases of an increase of the 
supply at the previously prevailing price. An unusually heavy 
storm bringing the seaweed in large masses far up on the 
shore, or the invention of some new tool for getting it out, 
may enable each man engaged in this business to bring to 
market, with the same labor, a much greater amount ; or a bad 
season for fishing may cause a larger number of persons to 
seek to get a livelihood in this way. Ten thousand loads are 
now produced, or are ready to be produced, at two bushels of 
wheat per load. This, then, is the supply ; and it is to be ob- 
served that this is the supply equally whether the ten thou- 
sand loads are actually dug or not, if only those who are 
engaged in this business are ready to bring to market that 
amount at that price. In this situation one of several things 
may happen. 

1st. The increase of supply may coincide with an increase 



COMPE TI TION. 9 l 

of demand, due to the breaking up of new lands for tillage, 
or to the failure of some other species of soil-dressing previ- 
ously used by many farmers, or to a wider popular knowledge 
of the advantage of using the seaweed. This increase of de- 
mand may be just such as to take off the entire ten thousand 
loads, at the customary price. 

2d. That result is, however, unlikely. Even if an increase 
of demand should coincide with such a large and sudden in- 
crease of supply, it would be strange if the coincidence were 
so complete as to leave the price just where it was. If we take 
the more reasonable supposition that there is either no increase 
of demand, or an increase less than the increase of supply, 
shall we have, under the conditions existing, a new price 
resulting ? In strict theory this is not necessary. It is con- 
ceivable that, while the producers of this article stood ready 
to deliver ten thousand loads at two bushels of wheat a load, 
their interests, feelings, and habits, with respect to labor and 
subsistence, might be so balanced, that, rather than take less 
than the customary price, they would allow the production to 
fall to five thousand loads. 

3d. But this, again, is not probable. Although, as we shall 
see later (par. 145), there is great power in custom to fix 
prices, so much so that articles often keep the same price for 
years, in spite of considerable alterations in the conditions of 
production, it is not to be expected that so great a change as 
we have supposed to occur, would fail to establish a new 
price. The producers of seaweed being prepared to furnish 
ten thousand loads, and the purchasers being accustomed to 
take only five thousand, it is probable that the desire of indi- 
vidual producers to keep themselves fully employed at the 
business would induce Competition among the sellers of this 
article. 

129. "What is Competition? — This is the most important 
word in the theory of value. I have now used it for the first 
time, though it might have been introduced with equal appro- 
priateness, a moment ago, in describing the change of price 
from two to two and a half bushels per load. 

Competition signifies the operation of individual self- 



02 POLITICAL ECONOMY. 

interest, among the buyers and the sellers of any article in 
any market. It implies that each man is acting for himself 
solely, by himself solely, in exchange, to get the most he can 
from others, and to give the least he must himself. 

1. The idea of competition is opposed to combination. 
Wherever, and in whatever degree, buyers or sellers act in 
concert, whether by insisting upon a certain price, or by regu- 
lating the amount to be bought or sold, there competition is, 
in so far, defeated. In competition every man is supposed to- 
be active and alert to slip in ahead of every other man and 
sell his own product first, and sell it at a higher price if pos- 
sible. Men in this state act as freely and as independently as 
the minute particles of some fine dry powder absolutely desti- 
tute of cohesion. If any two particles in the economic mass 
stick together, so that one must move when, and as, and be- 
cause, the other does, competition is in so far defeated. 

(2) Competition is also opposed to custom. If in any degree 
one buys or sells at a certain price, if he buys or sells in a cer- 
tain place, if he buys or sells of or to a certain person, because 
he has done so in the past, he obeys the rule of custom. In 
competition men are assumed in every transaction to seek and 
find their best market, that is, the place to buy or to sell, in 
which, at the time, and under the circumstances existing, they 
can get most for what they have to sell and will give least for 
what they wish to buy. 

(3) Competition is opposed to sentiment. Whenever any 
economic agent does or forbears any thing under the influence 
of any sentiment other than the desire of giving the least and 
gaining the most he can in exchange, be that sentiment pat- 
riotism, or gratitude, or charity, or vanity, leading him to do 
any otherwise than as self interest would prompt, in that case, 
also, the rule of competition is departed from. Another rule 
is for the time substituted. 

130. The Action of Competition. — Such is competition in 
the economic sense. Now let us return to our island. We 
have said that, with the producers of seaweed ready to get 
out and deliver ten thousand loads, while formerly but five 
thousand were used, it was not likely that a demand for the 



DEMAND AND SUPPLY. 93 

additional amount would arise to carry off the entire amount, 
at the customary price of two bushels of wheat a load ; and 
that, consequently, competition would probably set in among 
the sellers of this article. Since there are not buyers enough 
to take off the whole supply, each producer will try to sell aU 
his own stock, no matter who else does not ; and since there 
is reason to apprehend that the price will sink below two 
bushels, he will try to sell as near that figure as possible, and, 
hence, he will sell as soon as he can find a purchaser. 

Through this force the price will begin to decline. It may 
be by slow degrees ; it may fall tumultuously. At two bush- 
els of wheat, a load, demand and supply are unequal — ten 
thousand loads are offered * : only five thousand are ready 
to be taken. At one bushel and three pecks, the supply will 
perhaps sink to nine thousand loads, since some of the more 
adventurous among the producers, the more daring and skill- 
ful fishermen among them, or those having the best gardens 
and fields around their cottages, may decide that they can do 
better for themselves. Meanwhile, we may suppose the 
demand to rise to six thousand loads, so numerous are the 
f at-rners who think that, at that price, it will pay them to use 
the dressing freely on their lands. At a bushel and a half, 
demand and supply still more nearly approach each other. At 
the new price, the quantity offered — the supply — rapidly falls 
off. Meanwhile the demand has increased, since, at a bushel 
and a half for a load of manure, the net produce of the fields, 
that is, the amount of wheat remaining in the hands of the 
farmer after paying for the manure, may be appreciably 
enhanced. Supply and demand may now stand, respectively, 
at eight and at seven thousand loads. 

Supply and demand remaining still sundered, it is neces- 
sary that there should be a further movement of price to 

* We have before stated that the supply of any article is not necessa- 
rily confined to the stock in markets or warehouses, but embraces all 
that producers stand ready to bring forward at the price named, within 
the period over which the demand extends. In the present illustration, 
we are assuming the producers to be getting out the seaweed from day 
to day. 



94 POLITICAL ECONOMY. 

bring them together. Whether that step shall be a short one> 
or a long one ; whether supply and demand shall be equal- 
ized at a price much, or but little, below a bushel and a half, 
depends on two things, first, the utility to the farmers of the 
soil-dressing, when in excess of seven thousand loads, which we 
may call its Final Utility ; and, secondly, the ability of the 
producers to do somethirig profitable besides digging and 
hauling seaweed. 

131. Final Utility. — This term has been used, in the fore- 
going illustration, with reference to the entire supply of sea- 
weed in excess of seven thousand loads, be that excess one 
hundred, or nine hundred loads. Strictly speaking, however, 
the term should have reference only to the last appreciable 
quantity which the purchaser is ready to take and which a 
producer is ready to supply. 

The following is Prof. Jevons' illustration of the difference 
between the total utility of any commodity, and the utility 
belonging to a particular portion of it. 

" A pound of bread, per day, supplied to a person, saves 
him from starvation, and has the highest conceivable utility. 
A second pound, per day, has, also, no slight utility ; it keeps 
him in a state of comparative plenty, though it be not alto- 
gether indispensable. A third pound would begin to be 
superfluous. It is clear, then, that utility is not proportional 
to commodity. The very same articles vary in utility, according 
as we already possess more or less of them." 

This descending scale of utility may be applied to suc- 
cessive quantities of seaweed, for the dressing of wheat lands. 
A farmer having a certain breadth of arable lands might 
profitably give two and a half bushels per load for the first 
ten loads, with which to dress certain of his fields. If no one 
stood ready to supply more of the seaweed, at a lower price, 
two and a half bushels would be determined as the price of 
the article. Were he to buy five other loads, he might have 
to apply them to other fields, the return from which would 
not justify the payment of more than two and a quarter 
bushels, a load. Now, it might be that a producer stood ready 
to deliver the additional quantity at that, but at no lower,, 



BUT ONE PRICE FOR A COMMODITY. 95 

price : if so, two and a quarter bushels would measure the final 
utility of the manure, and this will be its price. 

Were the farmer to buy three more loads, he might have 
to apply them to still other fields, from which the enhanced 
return would justify the payment of two bushels a load, but 
no more. As, however, it takes two to make a bargain, his 
readiness to buy at this price would not make this the price 
of seaweed. It is only when a producer is found ready to 
deliver the commodity at the price, that a new price is determ- 
ined. It might even happen that the farmer would be will- 
ing to take two more loads, if he could get them for a bushel 
and a half, a load, and that a producer would appear, willing 
to deliver the article at that price. 

Now, according to the course of our illustration, the farmer 
has bought twenty loads ; but the utility of the several parts 
of that aggregate amount has varied widely ; the utility of 
the first part was very great ; the utility of the last part com- 
paratively small. 

132. But One Price for a Commodity. — We have thus far 
assumed, for the purpose of illustrating the declining utility of 
successive portions of a commodity, that the farmer pur- 
chased the ten, the five, the three, and the two loads of sea- 
weed at different times, and at prices corresponding to the 
gain in the wheat crop resulting to him from the application 
of the manure. 

But suppose that the farmer had purchased the twenty 
loads at the same time, it is evident he would have paid one 
price for the whole. What would have been that price ? 
Would it have been the highest price paid for any portion ? 
Clearly not, since we have seen he could only afford to put 
the dressing upon certain of his fields, on condition of getting 
it at a much lower price. Would it have been at a price, the 
mean between the highest and the lowest ? Just as little ; 
for we have seen that producers stood ready to sell at one and 
a half bushels per load, which would not have been the case 
had the demand been sufficient to take off the supply at a 
higher rate. 

If, in an open market, under full competition, any portion 



96 POLITICAL ECONOMY. 

of a given commodity is to be sold at a certain price, then 
will all the portions of that commodity, sold at the same time, 
be sold at that price, whatever the degree of utility which may 
accompany each such portion. If I buy a quantity of food 
for my own consumption, I do not pay for that part which 
would suffice to keep me alive, a price such as I would pay, 
were it necessary, to be saved from starving ; for another part 
of the food, a price corresponding to the discomfort and dis- 
satisfaction I should feel in being insufficiently nourished ; 
and, for a third part a price corresponding to the pleasure of 
ample and generous sustenance. I pay one price for the whole, 
the same for every equal part. That price measures the final 
utility of the food to me : that is, the utility of the portion at 
which I cease to buy, the portion beyond which I would as 
soon keep the price in my pocket as have more of the food. 

Prof. Jevons states the case thus : " When a commodity is 
perfectly uniform or homogeneous in quality, all portions may 
be indifferently used in place of equal portions ; hence, in the 
same market, and at the same moment, all portions must be 
exchanged at the same ratio. There can be no reason why a 
person should treat exactly similar things differently, and the 
slightest excess in what is demanded for one over the other, 
will cause him to take the latter instead of the former. In 
nicely balanced exchanges it is a very minute scruple which 
will turn the scale and govern the choice. A minute 
difference of quality in a commodity may thus give rise to 
preference, and cause the ratio of exchange to differ. But 
when no difference exists at all, or when no difference is 
shown to exist, there can be no ground for preference, what- 
ever." 

133. What Constitutes an Economic Difference ?— In the 
foregoing paragraph, Prof. Jevons speaks of commodities 
between which no difference exists. Of course there are no 
two articles in the universe precisely identical. What Prof. 
Jevons means is that there may exist no difference, as viewed 
by the would-be purchaser, with reference to some use to which 
the two commodities may be put, which use two commodities, 
apparently varying in many respects, may indifferently serve. 



WHAT IS A MARKET. 97 

And it is to be noted that the existence or non-existence of 
an economic difference, will depend on the quality of the 
individual exchanger, on the purpose he has in view, on the 
scale of his transactions, and on other causes. Thus, a large 
dealer in poultry may buy five hundred pairs of chickens, in 
gross, only satisfying himself by a rapid examination that 
none fall below a certain standard as to size and condition. 
His customers, however, will inspect the individual fowls, 
with the greatest carefulness, and will perhaps be determined 
in their choice by considerations the most minute, and, possi- 
bly, whimsical. In the same way a wholesale lumber merchant 
may buy, in gross, a large amount of stock at a uniform 
price, and a half dozen of his customers may the next day go 
through his yards, each taking out, by preference, a certain 
portion as peculiarly adapted to some job of work he has on 
hand. 

The fact that several commodities have a generic name in 
common does not constitute them the same articles for the 
purposes of exchange. Thus, corn is not sold in the Chicago 
market as corn, but as corn No. 1, or corn No. 2. Spring and 
Winter wheat never bring the same price ; they are not one 
kind of commodity, but two, and a reason for a preference 
between them always exists. 

The proposition we are considering further requires to be 
modified with regard to the obstacles to exchange, the igno- 
rance or indifference of exchangers, etc. The consideration 
of these causes, as qualifying the principle that there can be 
but one price for any commodity, in the same market, at the 
same time, will be more conveniently postponed to the title 
(par. 149) The Friction of Retail Trade. 

134. "What is a Market? — Many definitions have been 
given to the word, market. As I apprehend it, the term, in 
political economy, should have reference, first, to a species of 
commodity ; secondly, to a group of exchangers. 

In this view, there is no market which is a market indistin- 
guishably for all or for several commodities, as for tea, iron, 
cotton and wheat ; but there is a market for each commodity, 
by turns, as a market for tea, in which tea is bought and sold ; 



98 POLITICAL ECONOMY. 

a market for iron, in which iron is bought and sold. Thus, 
there are as many markets as there are separate commodities. 

Secondly, a market embraces all those who contribute to 
the supply of or the demand for a given commodity in any 
place. Hence, all those who are ready to buy of or sell to 
each other belong to the same market, no matter where they 
live. 

I say, who are ready to buy of or sell to each other. It 
does not follow from this that all who in the same place are 
buying and selling the same article belong to the same market. 
Thus, suppose there are in New York five importers of tea, 
fifteen wholesale dealers in that article, a hundred retailers, 
and a half million consumers. All these do not belong to the 
same market. The importers of tea and the wholesale dealers 
constitute one tea market, the wholesale dealers and the 
retailers constitute another tea market ; the retailers and the 
domestic purchasers constitute still another tea market. 
There are as many markets as there are groups of exchangers. 
In the case supposed, there are three tea markets ; each has 
its own group of buyers and sellers ; and in each of the three, 
at any time, tea is sold at a price different from that at which 
it is sold in any of the others. Thus, the price for precisely 
the same sort of tea, in the market made up of importers and 
wholesale dealers, may be $1.00 ; in the market made up of 
wholesale dealers and retailers, $1.10, and in the market made 
up of retailers and domestic purchasers, $1.25. 

Hence we see that, without such a definition of the word 
market, it would not do to say that there can at any time in 
any market be but one price for a given commodity. There 
is never a day, in any great mart, when tea, iron, wool, wheat, 
or what not, is not selling at several different prices, it 
may be in the same street. 

135. But while within a great mart there may, thus, be 
many markets, any one of these markets may extend far 
beyond the limits of that mart. To pursue the illustration 
already offered, the five New York importers of tea may sell 
not to the fifteen wholesale dealers of that city only, but to 
twenty other wholesale dealers in Brooklyn, Jersey City, New- 



WHAT IS A MARKET? 99 

ark and other places within a radius of twenty or of fifty 
miles. A market is thus constituted of the five importers and 
these thirty-five wholesale dealers. Every one of the latter 
belongs as distinctly to that market as that one who lives 
nearest the City Hall, for he contributes as truly to the 
demand for tea in that market. Again, this body of whole- 
sale dealers, thus re-enforced, may sell not to a hundred but to 
a thousand retailers scattered throughout all that region. 
This group of exchangers makes up the market, and not the 
fifteen wholesale dealers and the one hundred retailers of the 
city of New York only. These one thousand retailers, again, 
sell, not to half a million, but to a million and a half of con- 
sumers of tea. 

All persons whose demand for, or whose supply of, a com- 
modity goes to make up the aggregate demand for or supply 
of that commodity, in any given place, and hence to affect the 
price of that commodity in that place, belong to the same 
market. 

136* But it may be said : this would make the whole 
world belong to the same market, and would, hence, take all 
significance out of the word. By no means. In the market 
which is made up of the five importers of tea, all perhaps 
having warehouses on one wharf in New York, and the thirty- 
five wholesale dealers of the surrounding region whom they 
supply, the price of tea will not, probably, be appreciably 
different from that which is paid in the market made up of 
the four Boston importers of tea and the twenty-five whole- 
sale dealers who buy of them. If, for instance, the New York 
price were to be lower than the Boston price, the New 
York importers would begin to offer their stock in Boston, to 
get the advantage of the higher price there prevailing, and 
would hence contribute to the supply of tea there, and hence 
would come, so far forth, and for the time, to belong to that 
market. 

But, in the market constituted of the wholesale dealers and 
the retailers of tea in and around New York, the price of tea 
may be one or two cents lower than in the corresponding 
market around Boston, without any of the New York whole- 

LofC. 



loo POLITICAL ECONOMY. 

sale dealers sending their stocks to New England, or any of 
the New England retailers coming to New York to take 
advantage of the lower price. 

In the market constituted of the retailers and the domestic 
purchasers of tea, far wider differences may exist. The price 
of the same quality of tea might be, and might long remain, 
live or ten cents higher in the grocery stores of Newark than 
in those of Worcester or Nashua, without a single New 
England grocer going to Newark to retail his tea, or a single 
Newark householder going to Worcester or Nashua to lay in 
his year's supply. 

I repeat my proposition : all those persons who contribute 
to the general demand for any commodity, as felt in any 
place, or to the supply of that commodity there available for 
purchase, and who, hence, serve, as buyers or as sellers, to affect 
the price of that commodity in that place belong to the same 
market. 

137. Normal Price. — If there were a good market for any 
given commodity, i. e., if competition were perfect ; (l) if there 
were no large stock of that commodity, but it could be pro- 
duced freely and equably throughout the year, as wanted ; (2) 
if the demand for it were uniform and strong, about the same 
quantity being required for use in every equal period of time ; 
(3) if no large " plant," or machinery, or great amount of 
capital in other forms, were required for its production ; (4) 
if the producers of that commodity had an easy resort, or 
economic escape, to occupations in which other commodities 
were produced, and if, in turn, producers in other occupations 
could readily and successfully take up the production of the 
commodity in question, then the price of that commodity 
would, at any time, be close to the cost of production. By 
cost of production we are to itnderstand, not the average cost of 
the whole supply, but the cost of that part which is produced 
<it the greatest disadvantage. 

That price would express the Final Utility of the commodity 
in question, that is, the utility of the portion which, at the 
price, it was just worth the consumer's while to purchase. 
That price would also express the sum of the efforts and 



MARKET VS. NORMAL PRICE. IOI 

abstinences of those producers who brought forth this com- 
modity under the least favorable conditions, of all who 
contributed to the supply. Inasmuch as this price is to be paid 
alike by all purchasers of this commodity, it follows that 
those who have produced it under more favorable conditions* 
will obtain a remuneration which will represent more than the 
sum of their individual efforts and abstinences. 

A price which corresponds closely to the cost of production 
may be called Normal Price. 

138. Market Price. — Inasmuch as the conditions recited in 
the foregoing paragraph are never fully realized, there is for 
every commodity, in every market, a Market Price which differs 
more or less widely from the normal price. 

This market price always measures the Final Utility of the 
commodity, that is, the utility of it to the last purchaser to whom 
it is just worth while to buy of it, at that price. Otherwise, that 
person would either not buy, which, by leaving a portion of 
the supply untaken, would determine a new and lower price, 
at which he or some one else would buy ; or, he or some one 
else would buy more of it, which, by adding to the demand, 
would determine a new and higher price. 

But while market price must always measure the utility of 
the commodity to the last purchaser, that is, the person to 
whom it is just worth while to buy at that price, market price 
does not always measure the efforts and abstinences of the last 
producer, that is, the person producing under the greatest dis- 
advantage : to whom, therefore, it is only just worth while to 
produce at that price. It is in this latter respect that market 
price differs from normal price. 

139. Relation of Market Price to Normal Price. — 
The causes which make market price differ from normal 

price are various. The illustration of them might be extended 
indefinitely. They may be grouped as follows : 

I. The existence of a stock. For the purpose of exhibiting 
in its simplest form the operation of supply and demand, 

*When we reach the department of Distribution, Part IV, we shall 
give the generic name of Rent to this excess of price over cost of pro- 
duction. 



102 POLITICAL ECONOMY. 

I took an article of which, it was assumed, no considerable 
stock existed at any time. The seaweed was supposed to lie 
in vast deposits on the shore, and to be got out (produced) as 
required. This is a condition which tends to keep market price 
close to normal price. In the case of most commodities, how- 
ever, a considerable stock always exists : a fact which pro- 
foundly influences market price. 

The existence of a stock is determined by various causes. 
In order that there may be grain to form the food of the long 
winter and early spring, seed must have been sown and the 
growing crop cultivated months previous. In order that there 
shall be a supply of wool in the market, sheep must have been 
bred years before. Many commodities make no such require- 
ment. In order that there may be grain, the processes of 
production must have been begun months back ; but, given 
grain, it is only necessary, in order to have bread, that the 
miller should have a day's notice, and the baker time to heat 
his oven. Hence, with an immense stock of grain, amounting 
to thousands of millions of bushels, there may be but a small 
stock of flour, of which only a minute fraction will, at any 
time, be in the form of bread. 

140. Distinction between Stock and the Supply. — 
The stock of any article in existence, at any time, must not be 
confounded with the supply of that article, considered as a 
commodity in the market. 

By the word supply, we express the quantity of a commodity 
offered at any given price. At one price the supply may be 
but a small fraction of the stock. At successively higher 
prices, larger and larger portions of the stock would be offered, 
that is, would come to constitute the supply — until a certain 
pi'ice would take off the entire stock. 

Indeed, the supply may even become greater than the 
stock, under a highly speculative organization of trade. Thus, 
in the grain or cotton market, or in the market for railway 
shares or government bonds, brokers daily offer to sell and 
contract to deliver vast amounts of the several commodities 
in which they deal, of which, perhaps, they possess little or 
none at all. 



MARKET VS. NORMAL PRICE. 103 

Sometimes it happens that those who are offering such com- 
modities are entrapped* by a combination of purchasers into 
contracts to deliver, on a certain day, more than the entire 
quantity within reach, or even in existence. In such a case, 
the supply is still the amount offered at the price. This it is, 
and not the stock, which, taken in connection with the demand 
for the commodity, determines the price. 

141. The necessity in some cases, the usage in others, of 
meeting the demand from a stock, and not out of daily pro- 
duction, causes market price to diverge from normal price, 
through excess or deficiency of production. 

In order that there may be wheat, three millions of persons, 
more or fewer, in the United States, plant the grain many 
months previous to the anticipated consumption of the wheat 
by the miller and the baker. These persons break up the land 
and sow the seed without mutual understanding as to the 
extent of their operations. Each is governed by a notion, 
more or less vague, as to the probable demand for wheat. It 
is not at all a matter of certainty that the mistakes in calcula- 
tion of one farmer will offset those of another. On the contrary, 
there is a strong tendency in the errors of producers to 
accumulate all on one or on the other side of the line of equable 
production. 

If the price of wheat, owing to a deficient supply, has been 
high, almost all producers will be found, the next year, largely 
planting wheat. This is likely to produce a surplus which 
will perhaps bring down the price below the average, where- 
upon farmers, with almost as much unanimity as in the former 
case, will, the next year, diminish their operations in this 
direction. Those who are sagacious enough to look about 
them and say : Others are planting wheat freely, therefore, I 
will plant something besides wheat, are exceptional. In pro- 
ductive industry it is the rule that men go in droves ; act 
under common impulses, with the result of causing excess and 
deficiency to alternate with great rapidity and often great 
violence. And this holds good, not alone of persons in the 



• This is called a " corner.' 



i°4 POLITICAL ECONOMY. 

lower departments of production. It is almost equally true 
of merchants and manufacturers and bankers. The select few 
who have the coolness and the sense to buy when others are 
most eager to sell, and to sell when others are most eager to 
buy, reap rich harvests of gain. 

142. Substitution of one Commodity for Another in Use* 
— The influence upon price of an excess or deficiency in the 
stock of a commodity may be greatly diminished through the 
tendency to substitute one article for another in use. Thus, 
the cereals are, to a great extent, substituted for each other 
in use ; one kind of meat for another,* and even bread for 
meat, or meat for bread, in the case of a marked deficiency of 
one or the other. If the crop of wheat be short, maize, bar- 
ley, rye, buckwheat and oats are increasingly made use of as 
food ; with a short crop of all the grains, resort is had to the 
cheaper kinds of animal food. The result of such substitu- 
tion is to raise the price of the substituted article, and to pre- 
vent the price of the article for which it is substituted from 
rising as high as it otherwise would. The two commodities 
are thus, for the time, and in a degree, joined together in 
price. A mutual dependency is established between them. 

143. Liability to Deterioration. — The influence upon 
market price of an excess in the stock of any commodity is 
greatly controlled by its liability, or non-liability, to deterior- 
ation. In the case of some commodities, the variations in 
price due to this liability are such as to make it appear that 
price has cut itself wholly clear from cost of production, or 
cost of reproduction. A commodity exceptionally subject to 
this condition may lose ten, thirty, fifty, or seventy per cent, 
of its price in a few days, or even in a few hours. Thus, in 
fish markets, the price of a fish might have been a shilling 
when the market opened at 5 o'clock in the morning, eight- 
pence at 10 o'clock, sixpence by noon, while at three or four 

* " We must, in fact, treat beef and mutton as one commodity of two 
different strengths, just as gold at eighteen carats and twenty carats is 
hardly considered as two, but as one commodity, of which twenty parts 
of one are equivalent to eighteen of the other." — Jevons — " The Equiva- 
lence of Commodities." 



CUSTOMARY PRICE. 105 

o'clock in the afternoon one could have it on his own terms. 
In the same way, strawberries are often sold on Saturday 
night at one-half or one-third the price of the morning. 

The necessity of storage, in the case of a postponed sale, 
has often the same influence on the price of a commodity as 
liability to deterioration. The dealer, not having facilities for 
storing his stock, may be disposed to let it go at a very low 
price. 

144. II. — Organization of Industry and Existence of Plant. 
— A second cause which makes market price differ from normal 
price is found in the organization of industry and the exist- 
ence of machinery and " plant."* It was to get rid of this 
cause that, in our extended illustration of the influence of sup- 
ply and demand upon price, we took a simple " extractive " 
industry, the gathering of seaweed along the shore, which 
could not be supposed to involve the use of numerous or ex- 
pensive instruments, or the exercise of much skill, and that 
we assumed the persons so engaged to be in a position readily 
to turn themselves to tillage or the fisheries, in case of a fall- 
ing off in the demand for seaweed. 

145. III. — Customary Price. — Another cause which makes 
market differ from normal price, is the force of custom. We 
owe the existence of a customary price, in some things, to the 
power of public opinion, which determines that there shall be 
a stated, well-known price for certain services and certain 
commodities ; and, in other things, to habit or the mental 
inertia of purchasers. Thus, in the former case, public opinion 
would not tolerate varying and uncertain prices of admission 
to places of public amusement, varying and uncertain tolls 
over bridges or fares on public conveyances, varying and un- 
certain fees for the performance of necessary services, such as 
those connected with physical comfort, the preservation of 
life, or the burial of the dead. It is seen and felt that to leave 
the buyer to haggle and bargain at the door of a theater over 
the price of admission ; on the brink of a river as to the sum 



* " Prices are liable to great fluctuations in trades in which there is a 
great use of fixed capital." — Marshall — " Economics of Industry." 



106 POLITICAL ECONOMY. 

to be paid for a cast across the stream ; in the sick room, 
about the fee for a prescription or the medicine that is to save 
life or relieve pain, would be indecent, intolerable. 

Hence, public opinion prevails to establish a price on all 
such occasions, which is alike irrespective of the actual service 
rendered in the individual instance, and of the cost of render- 
ing that service. The rule of final utility is here suspended 
or altogether abolished. The traveler might be willing to 
give a large sum, rather than pass the night in a storm, with- 
out shelter, on the bank of a river, but he gets a cast across 
for the customary price. The father would give all his for- 
tune, were it needed, for the prescription to save his child's 
life, or the medicine which the prescription calls for ; but, in- 
stead, under the rule of customary price, he pays the physician 
two dollars, or a guinea, as the case may be, and, at the 
apothecary's, pays for the medicine by the ounce, in silver, 
though he would pay for it, drop for drop, in his own blood, 
could it not be had otherwise. 

Where public opinion can not be trusted to establish a cus- 
tomary price, in cases like the above, the law generally enters 
and fixes the rates at which commodities and services shall be 
sold. Of course, the prices paid must be sufficient to make it 
worth while to keep up the service, whether of the apothecary, 
the physician, the ferryman, or the actor or opera singer ; 
but the price to be paid is made independent of the wealth or 
poverty, the knowledge or ignorance, the little or the great 
need, of the individuals purchasing. 

146. Influence of Habit on Price.— Far beyond the range 
of customary price, in the limited class of cases above referred 
to, is the effect of habit and mental inertia, in restraining, or 
wholly repressing, the movements of price. In the former 
class of cases, the seller consciously submits to a restraint 
upon his freedom of action imposed from without, viz., by 
public opinion or law. In the far wider field now in contem- 
plation, buyers and sellers are left free, so far as outside 
influence is concerned, but are constrained, in a higher or 
lower degree, by the laws of their mental constitution. No 
human being ever escapes from the force of habit. It is 



DEMAND AND SUPPLY. 107 

always easier to do what we have done before than to do what 
we have never done ; to do what we have done twice than 
what we have done but once ; to do what .we have done often 
than what we have done seldom. 

The degrees in which men are thus bound by habit differ 
widely. A capability of taking the initiative in action, mental 
courage and activity, freedom from fear and superstition, a 
readiness to meet new conditions and perhaps even a pleasure 
in encountering risks and odds, are among the fruits of culture ; 
they constitute an inheritance in families ; they even become 
a characteristic of nations and races. 

The effects of habit upon prices are important. Habit 
always in some degree, often in a great degree, resists the 
economic tendency to a new price. The effect is seen at its 
maximum in wages, the price of labor. A day's wages often 
remain the same through years. So strong is this tendency 
that wages sometimes remain unaffected by the presence of a 
number of unemployed laborers. Instead of wages falling until 
all the laborers are brought into service at the reduced rates, 
employers continue to pay the old rates to a smaller number 
of workmen. 

Over the price of goods habit exerts an influence not less real, 
though not equally powerful. It often suffices to keep price 
stable against an economic reason for movement, and even 
when movement takes place, it begins later and ceases earlier, 
by reason of this constant resistance. 

147 '. The Moral and Intellectual Elements of Demand 
and Supply. — Our definitions of demand and supply, as re- 
spectively the quantity of any given article which purchasers 
stand ready to take at a certain price, and the quantity which 
producers or holders stand ready to deliver at the same price, 
clearly recognize a moral and an intellectual element alike in 
demand and in supply. " Stand ready " to take or to deliver. 
Any thing which affects that^readiness, is, then, an element of 
demand or of supply. Supply is not a stock (Par. 140), a 
definite quantity, which must be sold, whether or no. It may 
be that out of a large stock, holders stand ready to deliver but 
a small quantity at the price offered. 



i°8 POLITICAL ECONOMY. 

The reason for withholding the stock may be found in the 
physical conditions attending the reproduction of the article, 
e. g., a scarcity of the material out of which it is made, or the 
reason may be found in an intellectual apprehension, just or 
mistaken, of the state of the market, or the probabilities of the 
immediate future ; or, waving this consideration, the reason 
for a larger or a smaller quantity being offered or taken at a 
certain price may be moral, that is, may be found in the 
greater or less tenacity of purpose, or the greater or less 
courage to undertake risks and sustain arduous and doubtful 
enterprises. 

In all variations between normal and market price, moral 
and intellectual elements are important factors. It often hap- 
pens that the producers or holders of an article, anticipating 
a rise of price, on some account which may prove to be wholly 
fictitious, will keep back the entire stock, only to sell it, a little 
later, at a price far below that which they could have obtained 
for it while the false apprehension lasted. 

More or less, false apprehensions enter to affect the demand 
for and the supply of every article in every condition of the 
market ; but the influence of this cause may be in one period 
ten times or a hundred times as great as in other periods. 
The contrast between a placid noonday and a "hurricane 
eclipse of the sun," is hardly more marked than the contrast 
between a peaceful, sluggish market and one excited by mys- 
terious rumors, emanating no one knows where, or wrought to 
frenzy by false reports manufactured by the parties to some 
great jobbing interest. 

148. Retail Contrasted with Wholesale Trade.— The fore- 
going holds good even of the wholesale markets, where the 
parties who buy and sell commodities are picked and skilled 
men, long familiar with the conditions of the articles in which 
they deal, with large opportunities, whether by price-currents, 
newspaper, post or telegraph, or by special and secret inquiry, 
for ascertaining all the facts bearing on the question, at what 
price they should buy or sell. 

In retail trade, the moral and intellectual elements of de- 
mand and supply play a much more important part. On one 



RETAIL TRADE. 109 

side is the merchant, who by frequent resort to the wholesale 
dealer is kept advised of the conditions of the market. On 
the other side is the " customer," a creature of custom, as the 
term implies ; often ignorant in the widest sense of the word, 
unintelligent and untrained ; always and necessarily ignorant 
in the special sense of being unacquainted with the conditions 
which should determine price, not knowing what a commodity 
ought to cost, and, in the case of many classes of commodi- 
ties, unable to judge of the quality of the goods offered, per- 
haps at the mercy of the dealer in the matter of the measure 
or weight. 

The merchant, again, is the possessor of capital, and can 
wait to dispose of his goods at the best time. The customer, 
on the other hand, is generally in urgent need of commodities 
for immediate use, and frequently poor, so that he must buy 
in small quantities ; perhaps even, in debt, so that he feels 
under a strong constraint to trade only with his creditor, who 
thus holds him at a double disadvantage, for how can he quar- 
rel, as to quality, measure, or price, with the man whom he is 
not able to pay for goods already had and consumed ? 

149. The Friction of Retail Trade. — From the ignorance 
and inertness of the " customer " arises what may be called 
the Friction of Retail Trade. " Retail price," says Mr. Mill, 
" the price paid by the actual consumer, seems to feel slowly 
and imperfectly the effect of competition, and where compe- 
tition does exist, it often, instead of lowering prices, merely 
divides the gain among a greater number of dealers. It is 
only in the great centers of business that retail transactions 
have been chiefly or even much determined by competition. 
Elsewhere it rather acts, when it acts at all, as an occasional 
disturbing influence. The habitual regulator is custom, modi- 
fied from time to time, by notions existing in the minds of 
purchasers and sellers, of some kind of equity or justice." 

And referring to this manifest inability of the customer in 
retail trade to look out for himself, in a struggle with the 
expert dealer, Prof. Cairnes says : " Between persons so quali- 
fied the game of exchange, if the rules be rigorously enforced, 
is not a fair one ; and it has consequently been recognized 



HO POLITICAL ECONOMY. 

universally in England, and very extensively among the bet- 
ter class of retail dealers in Continental countries, as a princi- 
ple of commercial morality, that the dealer should not demand 
from his customer a higher price for his commodity than the 
lowest he is prepared to take. Retail buying and selling is 
thus made to rest upon a moral rather than an economical 
basis, and, there can be no doubt, for the advantage of all 
concerned." 

150. Economic Forces Never Cease to Operate. — I am 
disposed to think that these eminent economists overrate the 
disability under which the customer suffers in retail trade ;. 
and, secondly, that the inference they draw from the un- 
doubted fact of the general prevalence of a customary price, 
viz., that this shows that competition is not the regulator of 
such trade, is not fully justified. To take an analogous case,. 
let one look around him, in any highly organized community, 
and he will see very little display of force in compelling 
proper things to be done, or in repressing acts injurious to 
society. He will see on every side men doing just and decent 
and even courteous and kindly things, respecting the rightc of 
others and making use inoffensively of their own powers and 
privileges, just as if all this were natural and pleasant to 
them, as, indeed it has, to a great degree, become. These 
actions appear to be spontaneous and instinctive ; and one 
thus looking around on the orderly and civil procedure of 
daily life, whether in social intercourse or in business, might 
think that force was not, in any proper sense, the regulator 
of that community ; he might conclude that good will towards 
others, self-respect and public spirit were universal. Yet if 
that power which in every civilized state is always at hand, 
however veiled or disguised, to protect person and property, 
to repress lawlessness and to punish crime, were once with- 
drawn, society would speedily be transformed, and the occur- 
rence of every form of rapine and violence would instruct the 
observer that, behind the fairest show of order, right dealing 
and courtesy, stands the armed force of the community. 

So, while within certain limits, competition seems to disap- 
pear wholly from retail trade, and custom and respect for the 



INTERNATIONAL EXCHANGES. HI 

rights of the purchaser enter to banish " higgling " from the 
market and to impose the one-price system, and thus retail 
buying and selling, as Prof. Cairnes says, comes to rest upon 
a moral basis, yet the economic forces always lie beneath, as 
the bed-rock below which the effects of moral forces can not 
go. Let the cost of an article rise above the customary price, 
and merchants will make an advance upon that price, in spite 
of custom. Let merchants demand an utterly exorbitant 
price, and competition will spring up, even among the least 
intelligent and least enterprising buyers. 



CHAPTER II. 

THE THEORY OF INTERNATIONAL EXCHANGES. ' 

151. We stated, in paragraph 119, that, on the whole and 
in the long run, the respective values of a number of articles 
will be nearly according to the amounts of labor that have 
been expended upon them, severally. That this will be true 
throughout any small community is seen in the consideration 
that, if certain articles failed to have as much, or nearly as 
much, value for the unit of labor as other articles produced in 
that community, some of the laborers who had been engaged 
in the production of the articles thus disparaged in exchange, 
would set themselves to making some other article or articles 
more highly appreciated. Either this would, at some stage, 
raise the value of the disparaged articles, through reducing 
the Supply of them ; or, if the community cared so little for 
those articles as not to be willing to pay a higher price for 
them, production in those lines would ultimately cease. 

Subject to important exceptions — such as will be indicated 
in paragraphs 339-342 — the respective values of articles will 
be regulated in the way that has been indicated, within any 
small community. Is any modification of this conclusion 
required, as exchange is conceived to be carried on between 
distant communities, constituting, perhaps, distinct nations ? 

152. We shall reach the essence of the matter if we assume 



1 1 2 POLI 7 'ICA L ECONOM V. 

the trading world to be confined to half a dozen islands, which 
interchange their products freely, but between which no move- 
ment of labor or capital ever takes place. One of these might 
have a tropical climate and rich soil, producing in abundance 
tea and coffee, tobacco, sugar and molasses, silks, spices and 
dye-stuffs. The population of this island we will assume to 
be in excess, the point of diminishing returns (par. 51) having 
long since been passed. Island No. 2 is like island No. 1, 
except that the point of diminishing returns has not yet been 
reached. Island No. 3 lies in some northern sea, producing 
hemp, wool, flax, and the cereal grains. Island No. 4 is the 
land of oil and wine. Island No. 5 is filled with extensive 
mines of coal and the useful metals. Island No. 6 has a poor 
soil, a bleak climate, and a scanty population, whose produc- 
tion comprises only ice, lumber, fish and furs. 

What, now, will be " the exchanging proportions " or terms 
of exchange, between these islands, at any given date ? Will 
it still be true that the values of their respective products will 
be nearly according to the amounts of labor (omitting capital, 
for the time, from consideration) which have been involved in 
their production, severally ? I answer, that, at any date 
which we may take for the purpose of our illustration, this 
would not necessarily be so. Assuming the strength, skill, 
intelligence and energy of all the laborers in all the islands to 
be equal, a given amount of labor in one island might com- 
mand the product of two days' labor in another island, while 
commanding the products of only half a day's labor in still 
another. This supposition is not an unreasonable one. Dif- 
ferences as great exist to-day among the countries of the 
world, even after making the allowances necessary to bring 
the several laboring populations to an equality in the respects 
of strength, skill, intelligence and energy. 

153. What, then, would govern the exchanging proportions 
subsisting between the several islands ? I answer that the 
only explanation which anywhere, at any time, can be offered 
for existing ratios of exchange, is found in the relation 
between supply and demand. Within each of the several 
islands taken for the purpose of our illustration, values would 



INTERNATIONAL EXCHANGES. 113 

approximately be regulated by labor, according to the princi- 
ple first stated. But, as between themselves, each of these 
islands would constitute a unit, whose terms of exchange 
with all the other islands would be determined by the Equa- 
tion of International Demand, to use the phrase of Mr. J. S. 
Mill. What is meant by this formidable phrase ? This : that 
values, in exchanges between these islands, will be governed 
by the demand of each island for the productions of all the 
other islands, as against the demand of all the other islands 
for those commodities which itself produces. In the case 
supposed, the play of economic forces may result in giving to 
a day's labor in one island a very great purchasing power in 
comparison with a day's labor in any other island, and a vastly 
greater purchasing power in comparison with a day's labor in 
some one other island. 

Thus, we might suppose the taste for olive oil and wine to 
be, at the date we have taken for the purpose of this illustra- 
tion, not widely spread among the other islands. In some, 
the uses of olive oil might not be known at all. In that case, 
there would be but little demand for the productions of 
island No. 4, as a whole. As between the producers of olive 
oil and the producers of wine, the force of competition would 
operate steadily to bring about the result that a day's labor 
in a vineyard would yield as much purchasing power as a 
day's labor in an olive grove. But, while the producers of 
olive oil and the producers of wine would thus be brought 
upon an equality as regards each other, both classes of pro- 
ducers would be at a disadvantage in comparison with pro- 
ducers in the other islands, generally. We might say, with 
the producers of any other island ; or we might suppose that, 
the mechanic arts being still in a backward state, island No. 
5 would experience a still smaller demand, relative to its 
laboring population ; and the inhabitants of that island might 
be obliged to continue getting out iron ore, smelting it 
in their furnaces, working it up in their forges, only to 
sell the products of a very long day's labor for the prod- 
ucts of nine hours' labor in island No. 6 ; ten hours' 
labor in island No. 4 ; six hours' labor in island No. 3 ; five 



U4 POLITICAL ECONOMY. 

hours' labor in island No. 1 ; three hours' labor in island 
No. 2. 

We have said, five hours' labor in island No. 1, and three 
hours' labor in island No. 2. How is this ? The productions 
of these two islands are the same ; their soil and climate we 
have assumed to be the same. Truly ; yet the fact that in 
one of these islands the stage of diminishing returns has been 
reached and passed necessitates, as we have seen, a lower per- 
capita production : a difference which might not be exagger- 
ated in the ratio of three to five. 

If, now, we assume a sudden development of the mechanic 
arts and a rapid and extensive use of iron in tools and ma- 
chinery, island No. 5, from being at the foot of the scale, as 
regards the purchasing power of a day's labor, might rise 
almost instantaneously to the top. A day's labor there might 
come to command the products of a day's labor in an island 
previously the most favored ; might soon come to command the 
products of two or three days' labor almost anywhere else. 
What island No. 5 has to sell has now become of supreme 
importance. The sugar planters of Nos. 1 and 2, the wheat 
growers of No. 3, the lumber operators and ice cutters of No. 
6, find that they can greatly increase their production with 
implements and machines made of iron. The iron-workers, 
therefore, realize rich gains, and fare sumptuously upon 
the products of all the other groups of laborers. 

Now, upon the assumption that labor and capital do not 
flow from one island to another, but only products are im- 
ported or exported, each island would be left indefinitely to 
its own economic lot, be that a hard one or a fortunate one, 
according to the demands from all the other islands for its 
characteristic products. 

154. In the case of these separate communities, does the 
failure of values to correspond to amounts of labor, depend 
upon the question of nationality? I answer, no : the failure 
of correspondence between value and labor would occur just 
as fully between two islands which were subject to the same 
government, as between one of these islands and still another 
island under a different flaff. The condition we have noted 



INTERNATIONAL EXCHANGES. 11$ 

is due entirely to the fact assumed at the beginning, viz. : 
that labor and capital do not pass from one of these trading 
communities to another. It has nothing to do with nation- 
ality. Among different communities, be these large or small, 
distant or near, there will be an incessant tendency, due to 
changes of population, to changes in the arts, to changes in 
commercial demand, to the varying character of the seasons, 
and to a score of other causes, to disturb the relation between 
labor and value. Except as these causes may offset each 
other, the one force which should restore the equilibrium that 
has been disturbed, is to be found in the movement of labor 
or of capital, or of both, from the communities where the 
unit of labor or of capital receives the smaller return to the 
communities where it receives the larger return. If that 
movement does not, in fact, take place, the differences noted 
may continue and may even increase from age to age. 

If, then, the failure of values to correspond to amounts of 
labor expended, has nothing to do with the fact of nationality, 
why should the economists, generally, have written of Inter- 
national Values, of International Trade, of the Equation of 
International Demand ? I answer, because nations seemed to 
them to furnish the most convenient units for illustrating the 
operation of the forces concerned. It is true, it was true even 
when Ricardo developed this theory, in the early part of the 
century, that there are definite portions of the same nation 
between which the movement of labor and capital takes place 
as slowly and tardily as, often, between two separate nations. 
It is even true that there are groups of nations perhaps widely 
sundered geographically, between which this movement takes 
place far more readily than between contiguous sections of the 
same country. 

Still, it is true now, and was true in a much higher degree 
when Ricardo wrote, that obstructions, physical, intellectual 
and moral, to the movements of labor and capital, tend to 
gather themselves along the boundary lines of nationality. 
This arises from differences of speech, of race, and perhaps, 
also, of religion, from prejudices against aliens, perhaps, also, 
laws putting them at a disadvantage ; from reluctance at self- 



n6 POLITICAL ECONOMY. 

expatriation, from physical obstacles of a marked character, 
which often, though not always, serve to divide nations from 
each other. Between any two given nations all the causes 
above noted may enter to raise to a maximum the resistance 
to migration. Between other two nations, only a part of these 
causes may operate, and may operate with greatly dimin- 
ished force. 

It was the foregoing considerations which induced the econ- 
omists to take nations as the units for illustrating the econo- 
mic effects of a cessation of the movement of labor and capital 
between separate communities. It has led, however, to 
misconception at two points : first, by creating the impres- 
sion that because nations were taken as units in this discus- 
sion, nationality was the real reason for the phenomena 
observed ; secondly, by diverting attention from the effects of ■ 
a cessation of such movements within the limits of national- 
ity. It would be safe to say that there are nations divided 
into a half -score of sections, between the two most friendly and 
fully contiguous of which the movements of labor and capital 
are scantier and slower than between certain two other nations, 
though separated by thousands of miles. 

Wherever the movement of labor and capital ceases, there 
all the effects which are, by the economists, attributed to 
national differences, become fully realized. In just so far as 
those movements are reduced or retarded, the natural opera- 
tion of competition, in restoring the normal relation of value 
to labor, is deferred or defeated. Even where movements 
of labor and capital actually take place, they may be so tardy 
and difficult that local causes may go on producing inequali- 
ties between the purchasing power of labor in neighboring 
communities, much faster than competition can efface them. 

155. It follows from what has been said, that, in the ex- 
changes of two considerable communities, be the same dis- 
tinct countries or isolated portions of the same country, from 
one to the other of which movements of labor or capital do 
not take place or take place so tardily and painfully that they 
fail to keep up with the tendencies to divergence indicated 
in the preceding paragraph, it follows, I say, that in the 



INTERNATIONAL EXCHANGES. 117 

exchanges between two such communities, articles may be 
imported into one of these communities, notwithstanding the 
fact that it could there be produced at a lower cost than in the 
community from which it was exported ; and this state of 
things may, under the conditions recited, continue indefinitely- 

This would scarcely happen between small contiguous com- 
munities. If in one of such communities, A., a certain kind 
of goods could be produced at lower cost than in communities 
B., C. and D,, all the labor and capital, employed, within that 
group, in the production of that article, would pass over into 
A.; and the entire production of that article for that group 
would soon take place in that single community. As a result 
of this play of economic forces, no one of these communities 
would long import from any other any kind of goods which it 
could possibly itself produce at a lower cost. 

Between communities or countries, however, experiencing 
no movements of labor or capital, exchanges of goods may, as 
we said, continue indefinitely to take place, notwithstanding 
the fact that the importing countries could, if they would, 
themselves produce many of the articles at a lower, perhaps a 
much lower cost than that at which they are actually pi*o- 
duced in the countries from which they are brought. Thus, 
to return to our six trading islands, we might suppose that 
the demand for olive oil and wine had become so great that 
the inhabitants of island No. 4 could, by one day's labor in 
their vineyards or groves, command the products of two days' 
labor in island No. 1. If this were so, it might clearly be for 
their interest to continue producing olive oil and wine only, 
even though their soil and climate were such as to enable 
them to produce sugar or coffee or tea or spices at two-thirds 
the cost of which they were actually produced in island No. 1. 
By applying all their labor force and capital force to that for 
which they had the most marked qualification, they would, in 
the result, obtain more of any and all products which they 
might desire, than if they were to give up a certain portion of 
their labor power and capital power to the production of arti- 
cles in respect to which their natural advantage would be less 
than in raising oil and wine, though it might be greater 



Il8 POLITICAL ECONOMY. 

than that enjoyed by the actual producers of the articles in 
question. 

156. That such would be the normal operation of the prin- 
ciple of self-interest will readily appear if we take the case of 
a skilled mechanic, say a blacksmith, in an agricultural com- 
munity. The smith may have been brought up on a farm, 
and he may, conceivably, be so strong, so quick in his motions, 
so handy with tools, that he could, to-day, do one-fourth more 
of farm work than any one in the neighborhood. Since then, 
he can do farm work better than the farm hands, will he leave 
his forge ? That will depend on the " Equation of Demand." 
If there be several blacksmiths in the community, so that the 
demand for the work of each blacksmith is small, and if the 
other blacksmiths are as well able to work at the forge as him- 
self, but are not, like himself, able to turn advantageously to 
farming, his economic interest may impel him to agriculture. 
If, on the other hand, he is the only blacksmith in the com- 
munity, the demand for his work will certainly be great, per- 
haps so great as to enable one day's labor on his part to com- 
mand two ordinary days' labor on the farm. In this case it 
would be the height of folly for him to leave his forge, since 
there he can acquire a value represented by 2, while on 
the farm the value of his product will be represented by 
only 1^. 

The reason of the case will appear still plainer if we con- 
template a country physician, who, having been brought up 
on a farm, and being accustomed to cultivate a small tract, for 
his health and pleasure, in the intervals of practice, might 
easily be as good an agriculturist as many of his neighbors. 
The question is, shall he buy farm products or raise them him- 
self ? I answer : so far as health and pleasure, in the intervals 
of practice, allow, he will do well to cultivate the land ; but 
as a matter of business he can not afford to sacrifice the 
smallest part of his professional work for the sake of raising 
vegetables instead of buying them. As a physician, he can 
easily command three or four days' labor, for one of his own. 
Even were he the best farm hand in the county, he would be 
throwing away a great economic advantage, were he to 



INTERNATIONAL EXCHANGES. 119 

attempt to raise from the soil all that which he desired to 
consume. 

157. Now, what we have seen the blacksmith and the coun- 
ty physician doing, nations and smaller communities are contin- 
ually doing, under the operation of the principle of self-interest. 
Many a country imports, generation after generation, commod- 
ities a., b. and a, which it could produce more cheaply than 
those who made them. The reason is, that there are other 
branches of industry, x., y. and z., in which it has a still higher 
relative advantage. So far as movements of labor and capital 
take place, there will be a constant tendency for laborers and 
capitalists to come to the more favored country, and here set 
up industries, a., b. and c. But this will, at the best, go on 
slowly ; and it may be altogether defeated by the discovery 
that commodities, m., n. and o., can be produced in the country 
in question, not, indeed, so advantageously as x., y. andz.,\)\xt 
far more advantageously than a., b. and c. Consequently, all 
the additional labor and capital coming into this country, in 
this generation and perhaps in the next, may be directed to- 
ward building up industries m., n. and o. ; and commodities 
a., b. and c. may continue to be imported. 

158. Such being the conditions under which trade takes 
place between countries, from one to the other of which move- 
ments of labor and capital do not occur, or occur so tardily as 
not to overtake the tendencies to local disturbance which have 
been dwelt upon, we have to note two things in closing this 
chapter. 

First, in any country, the value of an imported article does 
not tend to be determined by what would be the cost of pro- 
duction of that article in that country. It does not even tend 
to be determined by its cost in the country in which it was 
actually produced. The normal value of such an article, in 
such a place, depends on the cost of production of the article 
which is exported to pay for it, transportation being taken 
into account. 

Second, while it is for the interest of a country enjoying 
great economic advantages, to apply its labor power and 
capital power to certain lines of production, only, looking to 



120 POLITICAL ECONOMY. 

purchase from others many classes of commodities which it 
could produce as well as or even better than they, such a course 
is also for the economic interest of the countries with which 
it trades, since they are thereby enabled to obtain the products 
of the former country, at a lower, probably much lower, cost 
than that at which they could hope themselves to produce 
these, or to obtain them from any other quarter. 



CHAPTER III. 

MONET AND ITS VALUE. 

159. Exchange Arises out of the Division of Labor.— Men 

become the producers of that which they expect to consume 
but in part, if at all. Their choice as to what they shall pro- 
duce, ceases to be determined by considerations affecting their 
personal wants, and comes to be determined mainly, if not 
wholly, by considerations affecting their abilities and apti- 
tudes. They no longer produce that which they desire to eat, 
drink or wear. They produce that one among many things 
known to the market which they can produce to the best ad- 
vantage, let who will, in time, eat, drink or wear it. Their 
own wants they look to see, in turn, satisfied by the labor of 
others. 

To the market all producers bring their several products, or 
such part thereof as they do not care individually to consume. 
From the market each late producer, now become a consumer, 
carries away that which he is to eat, drink, or wear, or other- 
wise enjoy. In the market is done that which we call ex- 
change. 

The economic function of exchange is to bring producers 
and consumers together, and thus allow the division of labor 
to be carried as far as it will increase production. The divi- 
sion of labor has no economic virtue except so far as it in- 
creases production. When that point has been reached, a 
further subdivision of occupations and employments would be 
useless, or of merely curious interest. Exchange, in turn, has 



THE FUNCTION OF MONEY. 12 1 

no virtue except as it allows the division of labor to be carried 
out. Its sole function, economically, is to enable each species 
of wealth, each article known to the market, to be produced 
in the place and by the person where and by whom it can be 
produced to the greatest advantage. 

160. The Economic Function of Money. — In its function 
of bringing producers and consumers together, exchange dis- 
covers the need of the great agent of which we are about to 
speak — Money. Just as the occasion for exchange arises out 
of the fact of the division of labor, and as the economic 
efficiency of exchange is limited to that occasion, so the need 
of money arises solely out of the fact of exchange, and the 
economic efficiency of money is limited strictly to the occasion 
for exchange. The interests of a community require as much 
exchanging as will secure that division of labor which will 
achieve the highest productiveness of land, labor and capital ; 
and they require no more exchanging than this. They require 
as much money as will enable that amount of exchanging to 
be effected with the least effort and with the greatest assur- 
ance of a transfer of real equivalents ; and they require no 
more money than this. No economic efficiency other than or 
beyond that indicated, can justly be attributed to money. 

But how does money facilitate those exchanges which it is 
for the interest of society to have effected ? Just what is the 
function of money ? 

161. Double Coincidence in Barter. — Money facilitates 
exchanges by dispensing with that double coincidence, of 
wants and of possessions, which barter, i., e. exchange without 
the use of money, involves. We have seen that, so far as the 
division of labor is carried out, men cease to produce all or 
even the greater part of what they wish to consume. Pro- 
ducing that which they can produce to the best advantage, 
they look to others for those particular articles which are re- 
quired for the supply of their individual wants. The producer 
and the would-be consumer of each article, therefore, must get 
together, somehow, or else the wants of the community will 
remain unsatisfied. 

But that each producer for himself should find some person 



122 POLITICAL ECONOMY. 

who has what he wants and at the same time wants what he 
has, would involve very roundabout exchanges, occupying a 
great deal of time, and occasioning much delay and frequent 
disajjpointments. The bootmaker who wanted a hat for his 
own use might find many persons who would be glad to get 
pairs of boots, but had no hats to give in exchange, and sev- 
eral persons who had hats, indeed, to sell, but were already 
supplied with boots, before he found one person who both had 
hats and lacked boots. And, moreover, when that person 
were found, a further difficulty would probably arise from the 
failure of an exact equivalency between the two articles to be 
exchanged. A pair of boots might be worth more than a hat ; 
perhaps three pairs of boots might be worth four hats. Yet 
the bootmaker wants but one hat ; the hatter wants but one 
pair of boots. Things would soon get into a fearful muddle, 
this way. 

But if, by general consent, formal or implied, the producers 
of the community should hit upon one article which they 
would all agree to take in exchange for whatever they wished 
to sell, a vast saving of time and labor, of annoyance and dis- 
appointment, would be effected, especially if the article so taken 
should be one, say, wheat, susceptible of minute division, with- 
out loss of utility. 

162. Money, the Medium of Exchange. — What shall we 
call the function which the wheat would in this case perform ? 
Clearly it is something altogether beyond and in addition to 
its ordinary natural function, as wheat, which is simply to be 
made into flour, to be, in turn, made into bread. In the use 
proposed, the wheat would serve another purpose. What shall 
we call that purpose ? 

The function performed by the wheat, in the instance given, 
is that of a Medium of Exchange. The significance of the 
word medium, in this connection, is found in the fact that the 
wheat becomes an intermediate thing in the commerce between 
the producers and the consumers of any and of every article. 
The wheat is no longer an end, as when used for food, but a 
means to an end, which end may be boots, or hats, or gro- 
ceries, or what not. The person who takes wheat for what he 



THE MEDIUM OF EXCHANGE. 123 

has produced may already have more wheat than he could eat 
in a year. He does not take it with a view to eating it, but 
because with it he can obtain, in kinds and quantities and 
at times to suit his wants and convenience, whatever he 
may wish to eat, drink, or wear, or to warm or house himself 
withal. 

Now, the function which has been described is the Money 
function. Money is the medium of exchange. Whatever 
performs this function, does this work, is money, no matter 
what it is made of, and no matter how it came to be a medium 
at first, or why it continues to be such. So long as, in any 
community, there is an article which all producers take freely 
and as a matter of course, in exchange for whatever they have 
to sell, instead of looking about, at the time, for the particular 
things they themselves wish to consume, that article is money, 
be it white, yellow, or black, hard or soft, animal, vegetable, 
or mineral. There is no other test of money than this. That 
which does the money-work is the money-thing. It may do 
this well ; it may do this ill. It may be good money ; it may 
be bad money — but it is money all the same. 

163. Universal Acceptability of Money. — We said, all 
producers, since it is not enough that an article is extensively 
used in exchange, to constitute it money. Bank checks are 
used in numerous and important transactions of exchange, yet 
are not money. It is essential to money that its acceptability 
should be so nearly universal that practically every person in 
the community who has any product or service to dispose of 
will freely, gladly, and of preference, take this thing, money, 
instead of the particular products or services which he may 
individually require from others, being well assured that with 
money he will unfailingly obtain whatever he shall desire, in 
form and amount and at times to suit his wants. 

When any article, no matter what its substance or form, 
acquires this degree of acceptability, no matter how obtained 
or how retained, so that each person, in his place in the indus- 
trial order, without the expectation of consuming this article, 
and without reference to the character or credit of the person 
offering it, takes it freely from any man whenever he has any- 



124 POLITICAL ECONOMY. 

thing to sell, because he knows that any other man will freely 
take it from him whenever he may wish in his turn to buy, 
that article becomes money, and remains money while that 
condition continues. To serve as the medium of exchange is 
the money-function, and whatever does this is money. 

164. Money and Civilization. — It is evident that the intro- 
duction of money, even in a primitive state, vastly facilitates 
exchanges, and renders it easy to carry out the division of 
labor. It is further evident that the use of money is a con- 
dition precedent to an advanced state of industrial society. 
The division of labor could not without it be carried so far 
as is involved in complicated manufactures and extended 
commerce. 

" It has been wisely said," remarks M. Chevalier, " that no 
machine economizes labor like money, and its adoption has 
been likened to the discovery of letters." 

The allusion is probably to the noble sentence of Gibbon : 
" The value of money has been settled by general consent to 
express our wants and our property, as letters were invented 
to express our ideas ; and both these institutions, by giving a 
more active energy to the powers and passions of human 
nature, have contributed to multiply the objects they were 
designed to express." 

165. Historical Forms of Money — "We have said that any 
article which acquires a certain degree of acceptability 
throughout the community, would thereby become money, 
whatever its material or form. Yet material and even form, 
may have much to do with securing to any given article, at 
any given time, the requisite degree of acceptability. The 
industrial habits and the tastes of a people and their social 
conditions may make that money which among another people 
would be an impossible money. Rock salt long served the 
Abyssinians as money ; rice, the dwellers on the Coromandel 
shore ; cacoa, the aboriginal Mexicans ; olive oil, the inhab- 
itants of the Ionian islands ; wampum, the early New En- 
glanders ; tobacco, the early Virginians and Marylanders ; tea, 
compressed into small cakes, the Russians ; dates, the savages 
of the African oases ; beaver and seal skins, the peoples of 



VARIOUS FORMS OF MONEY. 125 

many northern lands. Cattle and sheep were employed as 
money, alike by the early Greeks, by the Romans who 
conquered the Greeks, and by the Teutons who conquered 
the Romans. 

166. The Metals as Money. — But, of all substances, the 
metals have enjoyed the widest use as money, from a remote 
period. Iron, lead, tin and copper, one or another, have been 
thus employed in nearly every country whose history is 
known. 

From its numerous and important uses in the domestic arts, 
in the chase, and in warfare, the first-named metal was the 
subject of such wide and constant demand as to make its 
further use as the general medium of exchange, i. e., as money, 
very simple and natural. The art of mining being in early 
times very crude, small quantities of iron represented a large 
-amount of labor, and thus contained a high purchasing power. 
Moreover, in comparison with wheat, cattle, and many other 
primitive forms of money, iron cost little or nothing to keep 
and was but little subject to waste, while a given mass could 
easily be divided into pieces of any required dimensions, which 
could again be reunited, by fusion, or by welding when heated. 
The money of Lacedsemon was of iron ; the Swedes used 
money of this metal during and after the exhausting wars of 
Charles XII. ; and iron is still reported to be so used by the 
inhabitants of Senegambia. 

Lead was extensively employed as money by the early 
Romans and the early English, and is still used in the same 
way by the Burmese. Tin was used by the Mexicans as 
money; was long so employed in Sweden, in long, flat blocks ; 
and is even now a medium of exchange among the Chinese 
and Malays and in Prince of Wales Island. 

But more than iron, tin or lead, has copper, in the later 
centuries, been used as money. Having, from its cost of pro- 
duction, a high value for its bulk, it came to supersede iron in 
this use, when the latter metal became too cheap to form a 
convenient money. During the silver famine of the middle 
ages, copper returned to be the chief money of circulation in 
Europe. And though, after the revival of silver production 



126 POLITICAL ECONOMY. 

through the discovery of Mexico and Peru, it fell out of use 
as a principal money of wealthy and prosperous countries, it 
has remained a considerable element in the monetary circula- 
tion of the world, even to this day. 

Platinum was for a brief period, between 1828 and 1845, 
used as money in Russia, where that metal is produced ; but 
the great difficulty of rendering platinum, now from ingots 
into coin, and again from coin into ingots, prevented the suc- 
cess of this experiment, notwithstanding that platinum is 
justly regarded as one of the noblest of the metals. 

167. The Precious Metals. — All the other metals, however, 
pale before the light of two transcendent substances, the 
Precious Metals, so-called, silver and gold. Having numerous 
important uses in the industrial arts ; possessing the highest 
adaptation for the purposes of ornament and decoration, the.se 
metals have always and everywhere exerted, beyond all other 
objects of human desire, a strange, a mysterious fascination 
upon the minds of men. 

168. Coinage. — Under the title, coinage, we may take ac- 
count of all methods of determining, for easy popular recog- 
nition, the quantity and quality of individual portions of that 
which is used as money. It is in their adaptations to the art 
of the coiner that the metals, and especially the precious 
metals, exhibit their most marked qualifications for use as 
money. With some kinds of money, indeed, no such mode of 
determination is required, the divisions being natural, as in the 
case of the red feathers and shells used as money, or of cattle 
and sheep, which only need to be counted. 

With other, and indeed, most, forms of money, it is neces- 
sary to give a customary shape to the pieces to be so used. 
The Abyssinians, who used rock salt as money, cut it into 
bricks of uniform dimensions, so that each person taking a 
brick in exchange might know how much salt he was receiv- 
ing. Here, the problem was merely mechanical ; no chemical 
tests were required. The salt being of reasonably uniform 
quality, the receiver was only interested to know its quantity. 

With money of gold and silver, and even of copper or iron, 
however, both the quantity and the quality of each piece 



COINAGE. 127 

offered may be brought into question, unless some means be 
adopted by which the piece shall be made to exhibit unmis- 
takably the amount of pure metal it contains. The problem 
is thus both a mechanical and a chemical one, and is solved by 
what we call, in the limited sense, Coinage. The metal is 
melted, and in that state is brought to the required degree of 
purity, or " fineness." It is then cast into ingots, and by suc- 
cessive mechanical processes, with machinery of great delicacy 
and power, drawn out to the required thickness, cut into 
planchets, " milled " around the edges, and stamped on both 
sides* with devices expressive both of the sovereignty of the 
nation under whose authority the coins are struck, and of the 
quality and quantity of the metal contained. 

Coinage has generally been regarded as an act of sov- 
ereignty, and the counterfeiting of the coin has been widely 
punished as treason. In England, the King's sovereignty 
only extended to the coinage of gold and silver, the private 
coinage of copper not having been prohibited until the present 
century. So important is the money-function, so strong is the 
tendency to abuse the privilege of coining, so helpless are the 
mass of the community, especially the poor and economically 
weak, under a corrupted coinage, that, even in popular gov- 
ernments, where prerogative is not known, the private mint- 
ing of money is punished by grave penalties. That coins 
shall fully perform their office as money, they must be taken 
readily, without suspicion, or at most, after a brief inspection 
such as even the ignorant and inexpert can give. 

169. What Determines the Value of Money ? — It is only 
the present inquiry which brings the topic of money into the 
department of exchange. Otherwise, money belongs to the 
department of production, as clearly as does any other agency 

* At first, coins were impressed on one side, as is now the "gall," 
the only native coin of Cochin China. This allowed the metal to be 
shaved from the smooth side of the coin. Afterwards characters were 
stamped on both sides, but the area of the coin was not fully defined, 
allowing the edges to be clipped, as is largely the case with the Tomans 
of Persia. Later improvements surrounded the coin with a well-defined 
rim, while the edges were milled to still further protect the integrity 
of the piece- 



128 POLITICAL ECONOMY. 

of trade or transportation, cattle, carts, railways or banks. 
The mining of the precious metals is governed by the laws 
which regulate the production of other kinds of wealth. The 
minting of gold and silver is equally a branch of production. 
Assayers, refiners and coiners are as much producers of wealth 
as the laborers employed in a pig-iron furnace. 

But under the title, Exchange, we may properly inquire 
why any one article, produced as we find it to be produced, 
under existing conditions, exchanges for so much of any other 
article, and not for more or for less. Pre-eminently in respect 
to iron or copper, silver or gold, when cut into planchets and 
stamped as coin, do we need to raise this question and discuss 
it in all simplicity and severity of reasoning, because the sub- 
ject has been allowed to become involved in a thousand diffi- 
culties, from the lack of clear definitions and from the failure 
rigorously to exclude every thing alien or adventitious. The 
discussion of the laws of money has engendered so much pas- 
sion and prejudice as to make it hard to secure a respectful 
attention, or even a rational attitude of mind towards any 
statement of monetary doctrine which differs in the minutest 
particular from that of the hearer. Men who are candid and 
even liberal in politics and religion become furiously or 
stupidly fanatical as soon as their views on money are contro- 
verted. "When Sir Walter Scott made a surly critic say to the 
author of certain Letters on the Currency, " In your ill-ad- 
vised tract you have shown yourself as irritable as Balaam 
and as obstinate as his ass," he evidently intended to charac- 
terize the whole race of writers on this theme. 

The value of money, like the value of any thing else, is 
purely a question of demand and supply. The cost of produc- 
ing money is only important as affecting the supply. Limit 
the supply,* and it does not matter whether there be any cost 
of production or not. The advantage of taking that for use 
as money which has an appreciable, definite, and, as far as may 
be, constant cost of production, is found in the fact that the 

*I have already quoted (par. 120) the remark of Prof. Senior that 
"any other cause limiting supply is just as efficient a cause of value in 
an article, as the necessity of labor to its production." 



THE MONEY DEMAND. 129 

supply of such money will be limited by natural causes, 
instead of being left to law, convention or accident. 

170. What is the Demand for Money? — The demand fo r 
money is the occasion for the use of money in effecting ex- 
changes. In other words, it is the amount of money- work to 
be done. 

This is not determined by the gross volume of the wealth 
of the community, since all that wealth is not to be, in fact, 
exchanged. For a similar reason, it is not determined by the 
amount of the annual production of the community. 

It is not determined even by the volume of products to be 
exchanged, inasmuch as some classes of these may require to 
be exchanged several times, and some but once. Moreover, 
in spite of the difficulties of barter, many products are, through 
a fortunate coincidence of wants and of possessions, especially 
in agricultural communities, exchanged against each other. 
More important still, the modern organization of commerce, 
especially through the agency of banks, provides for the crea- 
tion, and subsequent cancellation, of indebtedness* on account 
of products given and taken in exchange, to an extent which 
vastly diminishes the actual use of money in effecting transfers. 

171. The Money-Demand a Keality. — Not the less, is the 
demand for money a reality. Banks and clearing-houses, 
checks and book credits reduce the occasion for the use of 
money, but they do not supersede its use altogether, nor are 
there any signs that they will do so in any future, near or re- 
mote. In every community, though in some more than others, 
goods are offered for money. Men seek money, having in 
their hands wherewithal to pay for it. Some of them must 
have money, whatever it cost. With others any appreciable 
increase in the difficulty of getting money, or any appreciable 
doubt as to the " goodness " of that which is circulating in 
the community, does away with the disposition to obtain it, 
drives them to barter, and thus destroys a portion of the de- 
mand for money. 

Some part of the exchangers of every community may be 

*This iunction of banks will be spoken of, more at length, under that 
title in Part VI. 



130 POLITICAL ECONOMY. 

regarded as always on the verge of barter. They could ex- 
change their products for the products of others which they 
wish to consume, without unreasonable trouble. Others, again, 
would exchange their products for money in the face of very 
great difficulties and embarrassments ; yet for each of these is 
a point at which difficulties and embarrassments will give rise 
to an effort, which will thereafter increase rapidly in force, to 
resort to barter or to credit, as the means of escaping the use 
of money. Should the matter proceed far enough, produc- 
tion will even be limited or modified to meet the exigency. 

172. Effect of Discredit on the Money-Demand.— Thus, if 
the money of a country be openly discredited, as in France 
prior to and during the Hundred Years' War, and, again> 
during the Revolution ; in England, under Henry VIII. and 
the Protector Somerset ; in the United States, during the cir- 
culation of the so-called Continental currency ; and in Italy, 
through many dreary periods of her history, men will not only 
resort increasingly to barter or to credit, but such discredit 
of the coin or other circulating medium may become a force 
which will operate powerfully to modify and even to limit 
production. Men will produce fewer things and those differ- 
ent from what they would have done under conditions more 
favorable to the division of labor and the consequent exchange 
of products. 

This, however, can never be carried so far as totally to dis- 
pense with the use of money. In any society above the bar- 
barous state, something must be used, to some extent, as 
money, so long as production goes on at all. 

We see, thus, that the demand for money has no definite 
relation to the total wealth, or the annual product of a com- 
munity, or even to the volume of products to be exchanged. 
The demand for money varies with the amount of money- 
work to be done, which, in turn, varies with the industrial 
organization of communities, with seasons, and with circum- 
stances innumerable. Not the less, however, as we said, is the 
demand for money a real thing. Goods are offered for 
money ; and, with a given supply, the more goods are so 
offered, the higher will be the value of money — that is, prices 



THE MONEY SUPPLY. 13 x 

will fall. The fewer goods are offered, the lower will be the 
value of money — that is, prices will rise. 

173. Value and Price.— It will have been noticed that, in 
the foregoing paragraph, I have used the word price as signi- 
fying the money-value of goods. As we stated in a previous 
chapter, value is the generic term which expi-esses power-in- 
exchange. Price is power-in-exchange-for-some-one-article. 
Where money is used, price commonly expresses power-in 
exchange-f or-money. Where nothing to the contrary is inti- 
mated, the price of an article is understood to be the value of 
that article in terms of money — the amount of money it will 
command in exchange. 

1 74. What is the Supply of Money ? — If such is the demand 
for money, what is the supply ? It is the money-force avail- 
able to do the money-work required to be done, in the given 
community, at the given time. The money-force, or the sup- 
ply of money, is not measured by what is usually called the 
amount of money, that is, the number of gold dollars or bits 
of paper used as money, but is composed of two factors — the 
amount of money and the rapidity of circulation. " The 
nimble sixpence does the work of the slow shilling." There 
may be as much money-force in 1000 dollars, each of which 
passes from hand to hand four times a week, as in 4000 dollars 
which change owners but once from Monday morning to 
Saturday night. The rapidity of circulation varies widely 
among different communities, according to the density of set- 
tlement, the prevailing occupations of the people, the facilities 
for the transportation of freight and passengers. And the 
rapidity of circulation not only varies according to such gen- 
eral conditions, but it varies from day to day, with the state 
of trade and the temper of the public mind. 

175. The Money Supply a Reality.— But while the money- 
supply varies thus incessantly, it is none the less a real thing ; 
so real that, at any given time a decrease of the supply of 
money will enhance its value — that is, will lower prices ; and 
an increase of that supply will reduce its value — that is, will 
raise prices. 

We have spoken of reducing the value of money as equiva- 



132 POLITICAL ECONOMY. 

lent to raising prices ; and of enhancing the value of money 
as equivalent to lowering prices. This is manifest enough to 
anyone who thinks of the matter ; but the student of political 
economy needs to become so familiar with this equivalency 
that he will not have to think consciously about it ; but the 
one mode of expression will always and instantly suggest its 
equivalent. To enhance the value of money is, of course, to 
give a larger purchasing power to each integral part of the 
circulating money — that is, to each piece or coin, and to any 
given number of pieces or coins. But if money purchases 
more of other things, other things, conversely, purchase less 
of money — that is, bear lower prices. 

On the other hand, to say that the value of money is low- 
ered, is to say that money purchases less of other things ; but 
if money purchases less of other things, other things, con- 
versely, purchase more of money — that is, bear higher prices. 

176. International Distribution of Money. — We have 
seen that it is impossible to say what, at any time, in any 
community, is the demand for money, or the supply of 
money. We have now to see that, with money having a 
natural cost of production, no one has any need to know, 
either how much money there is, or how much is needed, 
inasmuch as the demand for money will, under such a system, 
easily and surely, because automatically, bring in the due 
supply required to enable all the exchanges of the community 
to be transacted with the minimum of effort and delay, 
and with the highest assurance of the exchange of real 
equivalents. 

The territorial distribution of money is effected through 
the agency of Price. 

Let us suppose that, of two trading countries having the 
same kind of money, the amount in each, i. e., the number of 
pieces or coins, is such that, the rate of circulation being what 
it is, and the demand for money what it is, the scale of prices 
in the two countries precisely corresponds, cost of transpor- 
tation of goods being, for the purposes of the illustration, left 
out of account. Now let us suppose that, all other elements 
of the case remaining unchanged, the amount of money in 



THE MONEY MOVEMENT. 133 

one of these countries, A, is suddenly and largely increased, 
say, by the discovery of treasure or by the opening of new 
mines. The supply of money having thus been increased, the 
value of money, as we have seen, must decline, that is, prices 
must rise. A given amount of money will purchase less of 
other things than before, which is equivalent to saying that 
other things will purchase more of money. 

Now, if goods will purchase more money in that country, 
the owners of goods in the other trading country, B, will at 
once feel themselves impelled by self-interest to send their 
stock thither, to secure the benefit of the higher prices. Hav- 
ing exchanged goods for money in A, they will bring the 
money back to their own country, B. Why not invest the 
money in the country where they sold the goods ? Because, 
by the conditions assumed, though A is, as they have found, 
an excellent market to sell in, since prices are high, it is, from 
that very fact, a bad market to buy in. 

177. And while all owners of goods in B are hurrying to 
get their goods to A, in order to take advantage of the higher 
prices prevailing there, every holder of money in A is equally 
impelled to get his money as soon as possible to B, in order to 
take advantage of the lower prices there. Where all parties 
are so fully agreed, the thing is likely to be done quickly. 
Money flows from A to B until the equilibrium which was dis- 
turbed has been restored, that is, until the general scale of 
prices is the same in both countries. After this, the two 
countries will continue to trade as before ; but each will keep 
its own money. A will pay for the cotton, rice and sugar of 
B with its own wheat, lumber, coal and ice. 

178. The Money Movement Automatic It will be ob- 
served that the movement of money which has been described 
was not due to any one discovering that A had more money 
than it needed, or than its proportional share. No statistician 
or banker announced this result after computing the demand 
for money and the supply of money in that country. The 
exchanges which restored the equilibrium of prices were 
due wholly to the action of individuals, moved by a view of 
their own interest. Not one of them cared, perhaps not one 



134 POLITICAL ECONOMY. 

of them knew, whether money was in excess in A, or not, but 
each, finding that by sending goods from B to A, or money 
from A to B, he could secure a profit, contributed to the 
result. 

We have seen, in speaking of retail exchanges (par. 149), that 
a great amount of resistance is experienced in the operation 
of what are called " the laws of trade," and we s"hall have 
occasion to note, when we come to speak of wages, that the 
laborer's inertia, ignorance and poverty defer greatly, and 
even sometimes defeat altogether, the movements from place 
to place, or from occupation to occupation, which is required 
to secure his interests. 

While the actual freedom and fullness of movement can, in 
no department of economic activity, reach the theoretical 
maximum, the result is more nearly obtained in the depart- 
ment under consideration than in any other. The persons 
who ship goods or money, in consequence of excess or defi- 
ciency in the money supply, being merchants of large experi- 
ence and ample means, kept fully advised of the state of the 
markets by weekly letters and price-currents, and in later 
years, by information received daily, and now, even by hourly 
reports, through land telegraphs and ocean cables, the actual 
here closely approximates the theoretical readiness and com- 
pleteness of movement. At the same time, it is easy to exag- 
gerate even that readiness and completeness. 

179. Picking or Selecting the Coin.— We have seen that 
any local excess of money, as between one country and 
another, immediately sets in motion forces which tend to 
restore the equilibrium. The local excess of money also pro- 
motes the use of the precious metals in the industrial and 
decorative arts. This application of the metals, always con- 
siderable, may be readily increased through a reduction in 
their value. As less and less of other things, wheat, iron or 
cotton, or of labor which produces all these things, will pur- 
chase a given amount of gold and silver, more gold and silver 
go to the melting pot. 

In the case of exportation, or the melting of coined money, 
due to local excess, what determines the selection of the coins 



SELECTING THE COIN. 135 

to be exported or melted ? Is it purely a matter of chance, or 
is it controlled by the comparative proximity of coins to the 
place of exportation or the seat of the manufacture of jewelry, 
or of dental goods, or of photographers' supplies ; or does 
some distinct economic force enter to decide that certain coins 
shall go and others stay ? Let us inquire. 

180. Irregularities in the Coin. — In the process of coin- 
ing, it is inevitable, notwithstanding the truly admirable 
science and skill applied to this art, that differences should 
exist between coins. The mints of some countries do their 
work much more exactly than others ; * but the best mints can 
not turn out pieces absolutely uniform in fineness and weight. 
A certain range of variation must be allowed, and this is gen- 
erally formulated by law, and is known as the " tolerance " of 
the mint. 

Even were all coins issued of exact uniformity, the wide 
difference in usage would soon make an appreciable difference 
in their weight. Some go early into hordes or deposits ; others 
are worn down by almost continuous circulation ; others still 
are dealt with illegitimately by clipping, punching, and " sweat- 
ting," till a considerable portion of their substance disap- 
pears.! 



* Three gold coins, the Russian Imperials, the French Napoleons, and 
the American Eagles, are bought by the Bank of England without re- 
melting. The United States Mint turns out the finest gold coin of the 
world ; the Russian Mint the next best. The mint of France was, fifty 
years ago, charged with grave errors, all on one side, viz., in favor of 
the minters ; but that mint is now of high authority. The mint of Great 
Britain has until recently been badly managed and has done poor work, 
in comparison with the others named, not out of any dishonest intention, 
or lack of mechanical skill, but from adherence to old fashions and anti- 
quated machinery. Mr. Ernest Seyd and Prof. Jevons concurred some 
years ago in a very unfavorable criticism of the establishment on Tower 
Hill. More recently there has been improvement. 

f Prof. Jevons estimated the proportion of " light" sovereigns in En- 
gland, that is, of sovereigns reduced below the legal standard for circula- 
tion, to be 30 per cent. , the proportion in some agricultural districts ris- 
ing to 44 per cent. 



136 POLITICAL ECONOMY. 

If, now, with a body of coin of unequal value, a demand for 
the money-metal arises, for export or for use in the arts, the 
process of picking or selecting coin will at once begin. All 
merchants and bankers dealing largely in coin will lay by 
those of full or nearly full weight, and throw the lighter speci- 
mens back into circulation. 

This process of picking or selecting coin, begins early in the 
history of such a demand as has been indicated, and proceeds 
steadily as long as that demand lasts. The operation costs 
practically nothing, and the profit, where great numbers of 
coins are daily handled, is large and certain. Clerks and 
cashiers become so expert that they can tell light coins by the 
touch, while, if doubt exists, a pair of adjusted scales will in 
an instant decide the question. 

181. Gresham's Law.— The observation of this process of 
picking or selecting coin has led to the statement of the econ- 
omic theorem, known as Gresham's Law,* viz., that "bad 
money always drives out good money." 

Thus baldly stated, as in most treatises it is, the theorem is 
false. That effect will not be produced unless the body of 
money thus composed of heavy and of light coins, is itself in 
excess of the needs of the community, as determined by the 
law of the territorial distribution of money, which has been 
stated. In a country in which money is, according to this 
standard, deficient, a light coin may have, by reason of that 
deficiency, a nigher purchasing power than a heavy coin in a 
country in which money is in excess. f 

182. The Value Denominator, usually called the Measure 



* From Sir Thomas Gresham, founder of the Royal Exchange of 
London. Died 1579. 

f Mr. Ricardo clearly expressed this necessary qualification of Gres- 
ham's Theorem, but, in doing so, has been followed by few writers. It 
is, he says, "a mistaken theory to suppose that guineas of 5 dwt. 8 
grains, can not circulate with guineas of 5 dwt., or less. As they might 
be in such limited quantities that both the one and the other might 
actually pass in currency for a value equal to 5 dwt. 10 grains, there 
would be no temptation to withdraw either from circulation ; there 
would be a real profit in retaining them." 



THE VALUE DENOMINATOR. 137 

of Value.— Thus far we have spoken of but one function of 
money, that of the Medium of Exchange, and we have writ- 
ten as if there were but one. This has been for the purpose 
of fixing the reader's attention strongly on the work of 
money, as the medium of exchange. 

In addition to this function of money, however, nearly all 
economists are agreed in recognizing another independent and 
co-ordinate function of money, viz., as a " Measure of Value." 
" A second difficulty," says Professor Jevons, " arises in bar- 
ter. At what rate is any exchange to be made ? If a certain 
quantity of beef be given for a certain quantity of corn, and, 
in a like manner corn be exchanged for cheese, and cheese for 
eggs, and eggs for flax, and so on, still the question will arise 
— how much beef for how much flax, or how much of any one 
commodity for a given quantity of another ? In a state of 
barter, the price current list would be a most complicated doc- 
ument, for each commodity would have to be quoted in terms 
of every other commodity, or else complicated rule-of -three 
sums would be necessary. Between 100 articles there must 
exist no less than 4950 possible ratios of exchange. All such 
trouble is avoided if any one commodity be chosen, and its 
ratio of exchange with each commodity be quoted. Knowing 
how much corn is to be bought for a pound of silver, and, 
also, how much flax for the same quantity of silver, we learn 
without further trouble how much corn exchanges for so much 
flax. The chosen commodity becomes a common denominator 
or common measure of value, in terms of which we estimate 
the value of all other goods, so that their values become 
capable of the most easy comparison." 

183.— An Incidental and Subordinate Function. — Admit- 
ting the importance of having a value-denominator, in which 
the prices of all articles shall be expressed, we can not admit 
that this constitutes a separate and independent function of 
money, since it is evident that gold or silver, or any other 
article, can only serve as a value-denominator by and through 
being used as the medium of exchange.* It is only because 

* Hence we see the error of Prof. Bo wen's statement : " We can do 
without money as a medium of exchange, and can even barter commod- 



138 POLITICAL ECONOMY. 

silver, for instance, is, in fact successively exchanged against 
all the articles in the market that the respective values of these 
articles, in terms of silver, become known, and that it, hence, 
becomes possible to make up the price-current with 100 speci- 
fications, e. g. y and not with 4950. Instead of this being an 
independent and co-ordinate function of money, therefore, it 
is merely an advantage resulting from the use of money as 
the medium of exchange. It is, at most, an incidental and 
subordinate function. The better statement, still, would be 
that money serves as 
I. The Medium of Exchange: 

(a) Dispensing with the double coincidence required in 
barter. 

(b) Furnishing a value-denominator. 

184. — II. The Standard of Deferred Payments, usually 
Called the Standard of Value. — We have seen that it is of 
the essence of a sale for money, that the producer, or whoever 
at the time stands in the place of the producer, parts with his 
product, receiving therefor something which he does not 
expect personally to consume. His reason for receiving this 
article in exchange for his product is that with it he expects 
to obtain, in time and place and amount most suitable to his 
convenience, that which he shall desire to consume. In other 
words, he, by the act of exchange, defers his own consump- 
tion of the equivalent of his product, taking a piece or pieces 
of money, as a sort of certificate or pledge that he shall receive 
such an equivalent whenever he gets ready to enjoy it. It 
was in this view of money that Adam Smith said : " A guinea 
may be considered as a bill for a certain quantity of necessa- 
ries or conveniences upon all the tradesmen of the neighbor- 
hood." * 

ities for other commodities without the use of any medium. But we 
can not do without money as a common standard or measure of value." 
Were we to do without money in the former capacity, we should per- 
force have to do without it in the latter, inasmuch as it is only by being 
actually used as a medium of exchange, that the power of money to pur- 
chase each commodity by turns became known. 

* Prof. Senior calls money " Abstract Wealth." 



SALES ON CREDIT. 139 

It will appear that, looking toward the satisfaction of the 
producer's wants, a sale for money is only half a transaction. 
He sells his product for money, and must, in turn, sell, so to 
speak, his money for the product of others, such as he may 
desire personally to consume. To do this, however, though a 
two-fold transaction, requires far less of time and labor, and 
involves far less liability to ultimate disappointment, than the 
attempt to secure the "double coincidence of wants and of 
possessions," spoken of in par. 161. 

185. Money a Pledge of Future Enjoyment. — But while, 
in the very act of a sale for money, the producer defers his 
acquisition of the products of others, the question, when that 
acquisition shall be realized, remains for himself alone to answer- 
He has the money, and whenever he chooses to step into a 
shop and lay it down upon the counter, he may take his equiv- 
alent then and there, whether in meat or flour or groceries or 
clothes or tools for his trade. 

186. Sales on Credit. — We are now to contemplate trans- 
actions of a different character, which give rise to a new 
function of money, viz., exchanges where the equivalent is 
not, at the time, received by the seller of goods ; but where 
future payment is promised. These transactions are known 
as Sales on Credit, because the willingness of the producer to 
part with his goods, without at the time receiving an equiv- 
alent, depends upon the credit of the purchaser, or the degree 
of confidence attaching to his word or his bond. In such a case, 
the purchaser's character for honesty, his responsibility, as 
measured by the amount of his possessions, and the efficiency 
of the law in enforcing payments, all must be taken into 
account. 

187. The vast extension of credit-sales under the modern 
organization of trade, makes a new and very important requii'e- 
ment upon that article which is to be used as money, viz., that, 
in addition to being conveniently portable, not liable to deterio- 
ration or accidental injury, easily subdivided, etc., it shall be 
reasonably stable in value. Where a man takes money in his 
hand as the equivalent of the product sold, which we call a sale 
for cash, he has no anxiety on this account. He may exchange 



14° POLITICAL ECONOMY. 

his money for goods the same day. If not, it is because he 
does not choose to do so. The matter rests with him. But if a 
man is to forbear payment for a considerable time, it becomes 
of great importance that he should know what that which he 
is to receive at a distant date will be worth to him when he 
gets it. On the day of the sale, the money which is stipulated 
is worth the goods ; otherwise, the sale would not have 
taken place. On the day of payment, the money may be con- 
ceivably worth twice the goods, or only half the goods. The 
risk of some undeserved loss, the chances of some unearned 
gain, are inherent in the nature of sales on credit. Whether 
that risk of loss or chance of gain shall be great or small, will 
depend on the degree of stability which attaches to the value 
of the article used in that community, during that period, as. 
money. 

It is evident that articles which might be equally well 
fitted for use as money in sales for cash, that is, which might 
be otherwise equally well fitted to serve as the medium of 
exchange, may be very differently qualified to serve as what 
we call the Standard of Deferred Payments. 

188. The Grains and the Metals.— Thus, if we compare 
the grains and the metals, we note that the former are quickly 
consumed, the greater part in the first year, all within the sec- 
ond year ; while the latter last, even in active use, many 
years. The average " life " of iron may perhaps be stated at 
fifteen to twenty years ; the life of copper is much longer, 
and that of gold and silver covers several human generations. 

From these facts it results that, if the production of any 
grain, e. g., corn or wheat, falls off considerably, in any year, 
through excess or deficiency of moisture or heat, the value of 
that grain will rise rapidly, it may be to an inordinate height. 
The production of gold or silver, and, in a lower degree, of 
copper or iron, might be sensibly diminished for years with- 
out greatly affecting the quantity and, by consequence, the 
value of the existing stock. 

Now, if wheat were to be used as money, it would not 
infrequently happen that, in the irregular alternation of good 
and bad harvests, a producer selling his goods on one or two 



THE STANDARD OF DEFERRED PA YMENTS. 14 1 

years' credit, would, when the payment came to be mads, 
receive one-half as much more, or even twice as much in value, 
as he would have received had the payment been made at the 
time of the sale ; or he might receive only two-thirds or 
even only one-half what his goods were then worth. Nor 
could the injuries which the producer might suffer by receiv- 
ing less than the value of the goods he parted with, be trusted 
to be compensated by the unearned gains he might make at 
other times. So irregular and unaccountable is the occurrence 
of bad seasons, that one man might have nearly all bad luck 
and another nearly all good luck. The former might be ruined, 
bankrupted, and driven out of his shop or farm, before the tide 
turned in his favor. As many as seven successive bad seasons 
have been known in England. On the other hand, the metals 
are not subject to frequent value variations of great extent, 
though liable to incessant oscillations of moderate range. 
Gold and silver, especially, on account of their high degree of 
durability, are almost exempt from the influence of the pro- 
duction of a single year. 

189. Fluctuations in the Value of the Precious Metals.— 
But while the precious metals are thus almost a perfect " stan- 
dard of deferred payments," from one year to another, they 
are yet subject to great periodic variations from generation to 
generation and from century to century. The production of 
the precious metals is of the most spasmodic character. At 
times, a flood of gold, or of silver, or of both, has poured from 
newly-opened mines, as after the discovery of the mines of 
Potosi in 1545, and of the mines of California almost coinci- 
dently with those of Australia, in 1849-51; at times, on the 
other hand, mining industry has almost wholly ceased, either 
from the exhaustion of known deposits, or as the result of 
war or civil disturbance. Such a cessation of mining industry 
' followed the invasion of the Roman Empire by the Teutonic 
tribes. The series of revolutions and insurrections in the 
Spanish American States, beginning in 1809, destroyed the 
mining machinery, scattered the mining populations, and 
closed the mines of regions which had previously been among 
the most prolific sources of the world's supply of metallic 



142 POLITICAL ECONOMY. 

money. In agriculture, however, while incessant fluctuations 
in the supply of the grains, even those most largely and 
widely planted, result from the mutability of the climate, the 
changes from generation to generation, and from century to 
century, are not so far reaching. 

The vast breadth of arable land of reasonably uniform qual- 
ity ; the simplicity of the processes of agriculture, and the 
wide diffusion of the art of tillage ; the comparative immunity 
of the soil amid ravages which greatly impair, perhaps perma- 
nently cripple, manufacturing, and in an even greater degree, 
mining industry ; the limited applicability of the principle of 
the division of labor to agriculture and the relative inefficiency 
of machinery in-its operations : these causes combine to ren- 
der bread-corn, in truth, what Francis Horner pronounced it 
to be, " the real and paramount standard of all values." 

190. Corn Bents. — The superior stability of value of the 
cereals, through long periods of time, has led to the sugges- 
tion that, in the case of contracts extending over considerable 
terms of years, grain should be adopted as the standard for 
determining the obligations of the debtor, the rights of the 
creditor. To a limited extent this has been done ; but the 
tendency to express the consideration of all sales in terms of 
that which is the current money of daily use in the commu- 
nity is so strong that few persons, even of those who are act- 
ing as trustees, take the trouble thus to guard the interests 
they represent. The manifest convenience of having that for 
the standard of deferred payments which is also the medium 
of current exchanges, the indolence and want of initiative in 
the mass of mankind, perhaps, also, a superstitious regard for 
the precious metals, combine to withstand the reasons which 
urge the expression of rents, interest and annuities in terms 
of some leading grain, in the case of long leases, permanent 
loans and fixed charges upon land. 

191. Multiple or Tabular Standard. — It has even been 
proposed to go further, in the effort to avoid those undeserved 
losses which result to debtors or to creditors, from changes 
which take place in the value of even the precious metals 
through long periods of time. The scheme for a multiple 



DEBASED COIN. 1 43 

standard or tabular standard, to form which a great number 
of articles should be joined together, in order that their indi- 
vidual value-variations may offset each other, was, early in 
the century, suggested by writers in England and Germany, 
and has more recently been advocated by Prof. Jevons of the 
former, and by Prof. Roscher 'of the latter country. This 
proposed scheme will be briefly discussed in Part VI. 



CHAPTER IV. 

MONEY AND ITS VALUE — CONTINUED — DEBASED COIN : SEIG- 
NIORAGE. 

192. Debased Coin. — We now approach a question which 
should be decided entirely upon the principles regulating the 
value of money already laid down, yet which is the subject of 
so much misconception, which has been so covered-over with 
false reasoning and which is so sure to arouse prejudice and pas- 
sion, that it is needful for the teacher to accompany the student 
over the ground, and, if possible, save him from the pitfalls 
and quagmires into which trained logicians and practiced 
writers have fallen. Prof. Jevons has remarked that a kind 
of intellectual vertigo attacks all who treat this fatal theme of 
money ; and Ave have now reached the point where most peo- 
ple lose their heads. The beginner ought not to be left to 
find his way here alone, even if he has already been provided 
with the chart and compass to guide his steps. 

193. Seigniorage. — The most safe and convenient entrance 
to this land of gins, and snares, and griefs, is through seignior- 
age. That term has long been applied to the amount of metal 
abstracted by government, or the lord, the seignior, before 
coinage. Seigniorage may be of two kinds, or rather two 
degrees. 

1. When the cost, either actual or approximate, of coinage 
is taken out, and thus the state or the lord is reimbursed for 
the expense. 



144 POLITICAL ECONOMY. 

2. When more metal than is necessary to repay the expense 
of coinage is abstracted ; and thus the state or the lord makes 
a profit by the coinage. 

194. Cost of Coinage. — Let us consider the first. Shall the 
value of the coin be computed according to the market value 
of the contained metal, viewed as so much bullion, or shall 
the cost of the mintage be added to the value of the metal ? 
For instance, if the expense of making the coin called a dol- 
lar be one cent, shall the coin contain a hundred cents' 
worth of gold or silver, or shall it contain only ninety-nine 
cents' worth, and the cost of the coinage be added to make up 
the dollar ? 

On this point the opinions of economists and the practice 
of governments differ. Although the question involved is 
not wholly economic in its nature, but is in part matter of 
political and fiscal expediency, we will here briefly state the 
arguments on the one side and the other. 

On the one hand, it is said that gold and silver, being 
wanted in the form of coins, are, for that reason, worth more 
in coin than in bullion. Serving an additional use as coined 
money, they are the subjects of a demand over and above 
what exists for uncoined bullion, a larger demand justifying 
a higher price. 

It is urged that there is no more reason why gold in coin 
should not be valued higher than gold in bars, than there is 
why gold in bars should not be valued higher than gold 
imbedded in quartz. Note the treatment of the other metals, 
it is said : Iron is sold in the form of plates, rivets, rods, and 
chains, at more than the price of iron in the pig. In the 
same way, if gold in coin costs more, and is more useful than 
in ingots, those who want it in the form of coin, and not the 
whole community, should pay for the coinage. 

Moreover, it is urged, if such a charge be not made, a vast 
amount of metal will alternately be coined and melted down, 
recoined, and again melted. A seigniorage charge will put a 
premium upon the exportation or melting of coin so that bul- 
lion will be taken instead. 

195. Gratuitous Coinage. — It was in this view that Dud- 



SEIGNIORAGE. 145 

ley North called gratuitous coinage * " a perpetual motion 
found out, whereby to melt and coin, without ceasing, and so 
feed goldsmiths and coiners at the public charge." 

In the face of these considerations, however, some of the 
greatest commercial nations, England foremost among them, 
have maintained gratuitous coinage. Nor is this course 
wholly without economic justification. 

It is said that, while the expense of equipping, officering, and 
operating a mint is large, the difference in expense caused by 
minting more or fewer coins, is very small. For this, it is 
argued, the country establishing gratuitous coinage is com- 
pensated by the instantaneousness with which the export of 
gold follows the slightest accumulation in excess of the wants 
of trade. 

196. Seigniorage in Excess of Cost of Coinage — So much 
for seigniorage which only covers the cost of coinage.f We 

* The distinction between gratuitous coinage and free coinage, is not 
sufficiently observed. Where no seigniorage charge is made, but the 
coin contains the full amount of bullion which corresponds to its mint 
value, i. e., when the dollar contains one hundred cents' worth of metal, 
that is gratuitous coinage. Free coinage exists, where any owner of bul- 
lion has the right to have it coined on the same terms as the government, 
or as any other citizen, whether with or without a seigniorage charge. 
Thus free coinage exists in England in regard to gold. Any subject can 
bring gold, in any amount, to the mint and have it made into gold coin ; 
but free coinage does not exist with respect to silver, that metal being 
coined only in such amounts as the Government, through the Bank, 
deems necessary for supplying the people of the Kingdom with 
" change." 

In the United States free coinage exists also in regard to gold ; but the 
coinage of silver is restricted. By the law of 1878, the Secretary of the 
Treasury must coin two millions of silver dollars a month, and may coin 
four millions, but no more. The coinage of half and quarter dollars, and 
of smaller pieces of silver, is governed by the same principle as in En- 
gland. During the continuance of the bimetallic system (Part VI) in the 
states of the " Latin Union" (France, Italy, Belgium, and Switzerland), 
free coinage existed in regard to both metals. The coinage of silver is 
now restricted in those countries. 

f M. Chevalier has proposed to apply the term Brassage to the charge 
for the actual cost of coinage. 



146 POLITICAL ECONOMY. 

have now to speak of mint charges which exceed that cost, 
and become a source of revenue to the state. In the old days 
of high prerogative, kings frequently made their sole right of 
coinage a means of profit. In England, during the reign of 
Edward IV., the seigniorage on gold was above 13 per cent. ; 
during the reign of Henry VII., it once rose to 16 per cent. 
These, however, were exceptional instances in England. In 
France, in Italy, and in most of the countries of continental 
Europe, before the great revival of modern commerce, debase- 
ment of the coin was a favorite resort of weak or profligate 
monarchs. Both in quantity and quality, in weight and in 
fineness, the circulating money was pinched and robbed, until 
the actual amount of pure metal bore sometimes a ludicrously 
small ratio to the original fine contents of the coin. The En- 
glish " pound " was once a pound-weight of silver. The pound, 
of standard silver is now coined into 66, instead of 20 shil- 
lings. The " pound scots," of which we read, had but ■£% of 
its original weight. The florin and the Spanish maravedi 
were once pieces of gold. The former is now a piece of 
silver ; the latter a piece of copper. 

197. "What is the Effect of Seigniorage on the Purchas- 
ing Power of Coin ?— On this subject I follow Mr. Ricardo 
without deviation, believing that he was the economist who 
most fully and justly apprehended the relations of money to 
price ; and that departure from the principles laid down by 
that great thinker leads to confusion, misconception and need- 
less controversy. 

Let us suppose that a certain country requires for the pur- 
poses of domestic trade 1,000,000 pieces, each containing 100 
grains of fine gold. This would involve the use of 100,000,- 
000 grains of gold as money ; and a certain average level of 
prices would result from the relation between this amount (its 
rate of circulation being assumed constant, for the purposes 
of the following illustration), and the demand for money 
arising from the exchanges actually requiring to be effected 
by the use of money. 

Now, suppose the principle of seigniorage to be introduced, 
the sovereign, out of every hundred grains brought to the 



EXCESSIVE ISSUES. 147 

mint, taking one to repay the actual cost of coinage, putting 
into circulation 1,000,000 pieces of 99 grains each, and plac- 
ing 1,000,000 grains in his storehouse as treasure, or causing 
it to be manufactured into plate or ornament. There are now 
only 99,000,000 grains of gold in circulation, but the same 
number of pieces, each of the same " mint- value, " i. e., 100 
grains. 

Will each piece now purchase as much of other commodi- 
ties as before, or less ? 

I answer, as much. There is the same demand for pieces 
for the purposes of exchange ; there is the same supply ; the 
game prices must result. 

But suppose the sovereign proceeds further, and takes, not 
one grain, but ten, from every hundred, issuing 1,000,000 
pieces of only 90 grains each. Will the purchasing power of 
each piece be affected ? Not in the least. There is the same 
demand for pieces, the same supply. People still want pieces 
of money ; can only get them by giving commodities for 
them ; have as many commodities and no fewer to give ; and 
there are just as many pieces and no more to be obtained in 
this way. 

198. Excessive Issues.— But" let us take a step in a differ- 
ent direction. Let us suppose that the sovereign, instead of 
placing in his treasury the 10,000,000 grains which he took 
under his right of seigniorage, coins this gold also into pieces 
of 90 grains each, and pays them out for personal or public 
expenses. What will be the result ? Depreciation will at 
once begin. The 90,000,000 grains, when coined into the same 
number of pieces of the same official (mint) denomination as 
the 100,000,000 had been, retained the same purchasing 
power ; but when the 100,000,000 are coined into a larger 
number of pieces, the purchasing power of each piece at once 
falls. 

199. Eicardo's Statement.— " While the state alone coins," 
says Mr. Ricardo, "there can be no limit to this charge of 
seigniorage ; for, by limiting the quantity of coin, it can be 
raised to any conceivable value." 

" On the same principle," he remarks, " viz., by a limitation 



148 POLITICAL ECONOMY. 

of quantity, a debased coin would circulate at the value it 
should bear if it were of legal weight and fineness, and not at 
the value of the quantity of metal it actually contained." 

" In the history of the British coinage," he continues, " we 
find, accordingly, that the currency was never depreciated in 
the same proportion that it was debased, the reason for which 
was that it was never increased in quantity, in proportion to 
its diminished intrinsic value." 

Mr. Ricardo did not flinch from the assumption of a seig- 
niorage of 50 per cent. "There can," he asserted, "exist no 
depreciation of money, but from excess. However debased a 
coinage may become, it will preserve its mint value ; that is 
to say, it will pass in circulation for the intrinsic value of the 
bullion which it ought to contain, provided it be not in too 
great abundance." 

This doctrine, which has proved " a hard saying " to many 
economists, a stumbling-block and a rock of offense to many 
readers, is, it will be observed, merely the rigorous, courageous 
application of the principle that the value of money is determ- 
ined solely by the relation between demand and supply. I 
believe it to be the true doctrine of monetary circulation. 

It is not to be thought that Mr. Ricardo advocated a seig- 
niorage in excess of the cost of coinage. " The limits beyond 
which a seigniorage can not be advantageously extended," he 
says, " are the actual expenses incurred in manufacturing the 
coin." The objections to a debased coinage are two : First, 
inasmuch as the mint value of such coins is above the value 
of the bullion they contain, the excess of such coins in circu- 
lation may proceed to a high degree, producing mischievous 
effects upon trade and industry, before exportation begins, 
since, for use in foreign lands, the coins have value only accord- 
ing to the amount of pure metal in them. Secondly, the prac- 
tice of reducing the amount of bullion in the coins is deemed 
to be a dangerous one, because there is no point at which we 
can be sure it will stop. Every fiscal exigency of the govern- 
ment will suggest fresh attacks upon the integrity of the 
coin. 

These objections, the first of which alone is based upon eco- 



DISCREDIT OF THE COIN. 149 

nomic principles, are precisely those which we shall see (pars. 
441-445)offered to the issue of inconvertible paper money. 

200. The Omitted Proviso to Ricardo's Statement.— 
There is one proviso which should be attached to any state- 
ment of Mr. Ricardo's theorem regarding the value of debased 
coin. That Mr. Ricardo failed himself thus to qualify his 
proposition " that, however debased a coinage may become, it 
will preserve its mint value," has caused much misapprehension 
of his views. The required proviso has already been intima- 
ted (par. 172), when we were speaking of causes which may 
diminish the demand for money. 

If debasement of the coin be carried so far and carried on 
so long that a popular reluctance to receive the money pieces 
be generated, sufficient to cause men to modify or limit their 
production in order to avoid exchanges, or to cause them to 
encounter the inconveniences of barter rather than handle the 
distrusted coin, then depreciation may result. That is. the 
supply of money will become excessive through the blow 
inflicted upon the demand for money. But this can happen 
on no other condition ; and a popular reluctance to receive 
coins is not a necessary consequence of debasement. Why do 
men take money at all ? We said, in first describing the money 
function, that it is not because they have, at the time, any 
personal use for the gold or silver or iron or leather, or paper, 
or wood, of which it may be composed ; but it is taken as a 
means of obtaining, in due time and place, that which they do 
desire to consume. Men take money because they believe 
others will, in turn, take it from them. If a man be only 
assured of this, he has no reason to care, in fact he does not 
care, what the money is made of, what the coin contains. 

201 . Depreciation not a Necessary Result of Debasement. 
— Let us suppose the coin of a country, without being increased 
in amount, to be debased three per cent., and the fact to 
become known. The habit of accepting the coin is strong ; 
the acquired momentum of the circulating mass is great ; 
men must (1) either take the coins in exchange for their prod- 
ucts, or (2) they must cease to produce ; or (3) they must 
change their industry and produce that which does not need 



15° POLITICAL ECONOMY. 

to be exchanged, i. e. } that which they will themselves con- 
sume ; or (4) they must resort to barter. Now, any one of the 
latter courses involves an initial loss, greater, doubtless, much 
greater, than any possible loss in receiving coin debased three 
per cent. For this reason men continue to receive the coin, 
or, more properly, they continue to receive it without reason- 
ing at all about the matter, having been accustomed to take 
it freely. If any man, more thoughtful than his fellows, hes- 
itates to accept the money pieces, his doubts vanish on behold- 
ing all around him receiving it without demur. That is all 
he needs. If others will take the coins from him, his own 
occasions will, in turn, be answered. He does not want to eat 
the coins, or to make them into jewelry, but to use them in 
buying the necessaries of life. If they will do that, they are 
good enough for him. And so a full and free acceptance of 
a debased coinage might be established, in spite of a momen- 
tary feeling of reluctance, or even without such a feeling arising 
at all. Just this condition of things has existed, in many a 
country, many a time. 

Suppose that, after the community has become accustomed 
to a seigniorage of three per cent., some exigency of govern- 
ment, or the greed of the prince, should lead to a further equal 
debasement of the coin, making a total of six per cent. In 
that event, either the habit of accepting the coin of the realm 
would maintain the circulation of the debased money, or, if 
that circulation were to be challenged by popular objection, 
then the question would be presented to every man, as before, 
whether he would take this debased coin, or cease producing, 
in whole or in part, or change his industry so as to produce 
articles which would not require to be exchanged, or, lastly, re- 
sort to barter. It might easily happen that to do any one of the 
things last spoken of would cost any producer more than the 
possible loss by accepting coin debased three per cent, further; 
and, so, a full and free circulation of the debased coin might 
be maintained. 

202. And it is to be borne in mind that this coin circulates 
at its mint- value, not at a discount of six per cent., or of any 
other rate. There is no reason why the coin should be sub- 



DEPRECIA TION. 1 5 I 

jected to a discount. Assuming, as we have done, that the 
habits of the people in regard to production and trade have 
not been, as yet, changed by the debasement of the coinage, 
there are just as many goods to be exchanged as before. Just 
as many money-pieces are, therefore, needed, while no more 
money-pieces are to be had, since we have all along made the 
condition that the metal abstracted by the government should 
not be put into new coins. 

203. Depreciation Results from Excessive Issues. — But 
now let us suppose that, when the debasement has proceeded 
to the extent of ten per cent., government takes the gold and 
silver it has abstracted, and issues it in the form of new coin 
debased like the other. Immediately depreciation will set in. 
The value of money, like the value of any thing else, is determ- 
ined by the relation between demand and supply. The goods 
to be exchanged for money pieces remaining the same in 
amount, and the number of pieces having been increased, the 
purchasing power of each piece falls. 

So far the effect is the same as in the case of an excess of 
full-metal coin ; but, as depreciation proceeds, the essential 
difference between the two kinds of money appears. With an 
excess of full-metal coin, exportation begins at once. The 
country becomes a good market to sell in, a bad market to buy 
in, both for the same reason, viz., prices are higher there ; 
and the course of exchange will speedily bring in the remedy. 
With debased coin, however, no outlet is afforded until the 
depreciation reaches the point when the 90 grains of fine 
metal in the coin will bring more abroad, melted down, than 
the coin (though of the mint- value of 100 grains) will bring at 
home. Within this limit, depreciation may proceed without 
remedy. 

204. Inflation — A permanent excess of the circulating 
money of a country, over that country's distributive share of 
the money of the commercial world, is called inflation. Its 
influence on industry and trade, and on the distribution of 
wealth, will be discussed hereafter. 



152 POLITICAL ECONOMY. 

CHAPTER V. 

INCONVERTIBLE PAPER MONEY. 

205. In monetary science, the true entrance to paper money 
is through seigniorage. If we have rightly apprehended the 
relations of seigniorage to the circulation of coin, and to 
prices, we need have no difficulty in dealing with any ques- 
tion arising under the present title. 

" The whole charge for paper money may be considered as 
seigniorage." This remark of Mr. Ricardo is true and very 
significant. We have seen that the State may withhold 
from the coin one per cent, of the pure metal, to cover the 
cost of coinage ; that it may withold ten per cent., as a means 
of securing revenue for the treasury ; that the State may go 
further and, by successive invasions of the coin, take out two* 
thirds of the money metal, as in the case of the English pound 
sterling, or all but three per cent., as in the case of the pound 
Scots ; that it may even go further still and substitute copper 
for gold, as in the case of the Spanish maravedi. 

Now let the last step be taken in the same direction, and, 
instead of pieces of metal, let the public treasury issue pieces 
of paper bearing the names of the superseded coins, and we 
shall have a body of money governed by precisely the same 
principles, alike as to circulation and as to the resulting prices 
of commodities, as a debased coinage. Paper money is money 
upon which the seigniorage charge is one hundred per cent. 

206. Historical Instances of Inconvertible Paper Money. 
— The invention of paper money, like many another great 
discovery, is traced to the orient. When Marco Polo visited 
China in the twelfth century, he found in circulation a money 
consisting of pieces cut from the inner bark of the mulberry 
tree. These were issued " with as much solemnity and 
authority as if they were of pure gold and silver." A century 
later, one of the rulers of Persia introduced paper money in 
direct imitation of the Chinese, the imitation extending even 
to devices and names ; but the experiment here was less fortu- 
nate than the Chinese experiment, since, after two or three 
days of enforced circulation, the markets were closed, the 



PAPER MONEY. 153 

people rose, the officials were massacred, and the money dis- 
appeared. A century later, we hear of paper money in 
Japan. 

It took the duller-witted races of Europe some centuries 
more to comprehend the mysteries of paper money ; and 
meanwhile princes had to content themselves, when hard-up, 
with operating upon the coin, swearing their coiners not to 
divulge the secrets of the mint, and juggling their people just 
as far as the omnipresent scales and acids of the banker would 
permit. But when paper money became once fairly intro- 
duced into Europe, it was, like some of those other inventions 
and discoveries referred to, rapidly improved in its details 
and extended in its applications. 

An eminent writer on finance, M. Wolowski, claims for his 
native country of Poland the proud distinction, as he regards 
it, of having been the only nation in Europe which has given 
no example of the issue of paper money ; but it is to be 
remembered that Poland lost her independence a long while 
ago. Had she survived to the present time, it is not unfair to 
believe she would have her paper money history equally with 
the gigantic neighbors who crushed out her national life. 

Of the present States of Europe, all which border on the 
Mediterranean, excepting France and Italy, have inconvertible 
paper money, issued by government. Russia, though both a 
northern and a southern State, casts in its lot with the Med- 
iterranean nations in this respect. The northern tier of 
countries, Great Britain, France, Belgium, Holland, Germany, 
and Scandinavia, have paper money, indeed, but of that class 
which we shall describe, under a subsequent title, as Bank 
Money. 

207. Characteristics of Inconvertible Paper Money.-' 
The kind of money of which we are writing may either be 
issued originally by the State, as in the case of the present 
paper money of most of the southern States of Europe already 
mentioned ; as in the case of the " assignats " and " mandate " 
of the French revolutionary epoch ; as in the the case of the 
" Continental currency " of the American revolution, and of 
the " Greenbacks " and " Confederate notes " of the war of 



154 POLITICAL ECONOMY. 

secession ; or, secondly, it may result from the degeneration 
of bank money, originally issued with the character of con- 
vertibility, but, by some exigency of government or stress of 
commercial misfortune, losing that character, and protected in 
its inconvertibility by law, as in the case of the English Bank 
money of the "Restriction" (1797 — 1821), as in the case of 
the notes of the Bank of France during the revolution of 1848, 
and, again, during and after the war of 1870-71, and as in 
numerous other cases of minor importance. 

Generally speaking, forced circulation is an attribute of this 
sort of money, though that character may be disguised, espe- 
cially in the case of degenerated bank money, by one artifice or 
another. For instance, the money may not be made legal 
tender, but all remedy at law may be taken away from cred- 
itors who refuse to receive it. 

Paper may be declared to be redeemable in coin ; that prom- 
ise may even be borne upon the face of the paper ; but if pro- 
vision be not made so that, in fact, every holder of a note can 
obtain coined money therefor at will, the paper is inconvertible. 
If any conditions to redemption are interposed, it is none the less 
inconvertible than if redemption were not even promised. 

The pledge of public lands or stocks for ultimate payment, 
makes no difference, in this respect. No paper money is con- 
vertible, the full, immediate and unconditional redemption of 
which is not, at all times, within the choice of the holder. 

208. Is this Properly Called Money? — American econo- 
mists have generally agreed to deny the title, money, to such 
issues. Indeed it is as much as one's reputation for economic 
orthodoxy is worth, to concede that inconvertible paper may 
become money. 

If we seek a reason for this attitude of the economists, we 
find that it is because they deprecate the use of such a " cir- 
culating medium," deeming it mischievous, pernicious, destruc- 
tive of industrial and social well-being. But, as I have ven- 
tured elsewhere to remark, it would be as reasonable to deny 
that whisky is drink, because we deprecate its use as drink, as 
to deny that inconvertible notes are money because we depre- 
cate their use as money. 



ARE GREENBACKS MONEY? 155 

The economists have dealt with the subject as if the ques- 
tion were necessarily this, money or not money ? money being 
assumed to be, not only a good thing in general, but always 
beneficial, in all relations and under all circumstances. And, 
inasmuch as they think they have shown (in which I fully 
agree with them), that the use of inconvertible paper produces 
very injurious effects, they deny that it is entitled to be called 
money. 

According to the views presented in this treatise, the sole 
test of money is the performance of the money function. As 
has been said, that which does the money-work is the money- 
thing. If it does this work well, it is good money ; if it does 
this work ill, it is bad money. 

209. May Paper Money Serve as the Common Medium of 
Exchange ? — About this there can, I conceive, be no doubt 
whatever. Take the United States "Greenbacks" of 1862 to 
1879. Did producers accept them readily in full payment for 
goods ? Yes, with the utmost readiness. Did men resort to 
barter to avoid the use of this medium of exchange ? No. 
Did men refuse to produce, or contract their production, or 
modify it, lest they should have to receive those circulating 
notes in payment ? Again, no. 

There never had been a period in our history when the 
division of labor was carried further ; when the differentia- 
tion of industry and the diversification of production went on 
more rapidly. This is the sure test of the performance of the 
money function. The differentiation of industry and the 
diversification of production involve increasingly the use of 
money. Whenever production is being enlarged and diver- 
sified, there, without any question, something is acting suc- 
cessfully as the medium of exchange. 

Observe that it is not now a question of prices, of how many 
dollars in greenbacks were required in 1864 or 1874 to buy 
what ten dollars in gold would have purchased in 1860, or 
would purchase at the present time. That, as we have seen, 
is a matter of the volume and rapidity of circulation. The 
question now, is simply as to the freedom and fullness of cir- 
culation. 



156 POLITICAL ECONOMY. 

It is not asserted that such paper is always and everywhere 
money. It becomes money when it begins to do the money- 
work ; it remains money as long as it continues to do that- 
work ; it falls out of the category of money when it ceases to 
do that work. After the American Congress had issued the 
" Continental " money in such quantity that even the treasury 
ceased to keep a record of the issues, and the value had sunk 
to 200:1 of silver, there is no question that, for a short period 
before the notes finally disappeared and silver came back, the 
notes ceased to be money. Men would not take them ; modi- 
fied their production, or curtailed it to avoid the necessity of 
taking the discredited paper ; resorted increasingly to barter, 
in spite of all its inconveniences. The same fate befell the 
French " mandats " after the revolutionary authorities had 
issued " assignats " to an amount popularly stated at forty -five' 
thousand millions of francs. The Confederate notes ceased to 
be money upon the collapse of the government that issued them. 

210. May Paper Money serve as the Value Denominator P 
— It is at this point that the economists appear to me most 
deeply in error, insisting, as they do, that here is something 
which metal money does, but paper money can not do. 

It was said, in the last chapter, that money, in performing 
the function now in question, is commonly spoken of as the 
" Measure of Value." Now, what money does in this con- 
nection is no more than to serve as the common denominator 
of values, as described by Prof. Jevons, in par. 182. It was 
shown in the pages immediately following, that this function 
is not a separate and independent function of money, but a 
purely incidental and subordinate function ; that not only is 
any thing which is competent to serve as the general medium 
of exchange, adequate also to serve as the common denomin- 
tor of values ; but that any thing which does, in fact, serve 
as the medium of exchange, must, in the very act and part of 
doing so, create the price-current, which is what is sought 
under this title.* 

* The idea that values are " measured " by money, has a great deal of 
tenacity. A somewhat more extended discussion of this question will 
be found in my work on Money, Chap. XIV. 



ARE GREENBACK'S MONEY? I57 

If corn, beef, wool, potatoes, coal, and all other articles in 
the market are daily exchanged for that one article — money — 
no matter of what it consists, or why it became money, we 
have, as the direct result of those transactions, the means of 
comparing the values of corn, beef, wool, and all othep 
articles : that is, we have our price-current. If all those 
articles are exchanged against pieces of paper, we obtain their 
exchanging proportions just as really, just as accurately, 
readily and intelligibly, as when they are exchanged against 
pieces of gold, silver or copper. If one article brings three 
pieces of paper, another ten, another eight, we learn the com- 
parative value of those articles as quickly and easily as if the 
first brought three pieces of silver, the second ten, and the 
third eight. 

211. May Paper Money Serve as the Standard of 
Deferred Payments ? — We have seen that paper money may 
become the general medium of exchange, being taken as freely 
and eagerly as money of silver or gold. We have also seen 
that whatever serves as the general medium of exchange does, 
by that very fact, serve, also, as the common denominator of 
values, furnishing the price-current from which are determ- 
ined the exchanging proportions of all commodities in the 
market. 

That paper money may serve as the standard of deferred 
payments goes without saying. As was stated under a pre- 
vious title, forced circulation is generally an attribute of this 
sort of money, and where that is the case, such money 
becomes, by definition, the standard of deferred payments. 
By it the obligation of the debtor, the claim of the creditor, 
is measured, as of course. Even where paper money is not 
made legal tender, it is almost, if not quite, as likely to become 
the standard of deferred payments as a money of silver or gold. 
The tendency to express the consideration of all sales in terms 
of that which is the current money of daily use, is so strong 
that few persons, even of those who are acting as trustees, will 
take the trouble to make leases, rents, annuities or interest 
upon loans payable in any thing but the ordinary circulating 
medium of the time. 



I5 8 POLITICAL ECONOMY. 

The notes of the Bank of England were not legal tender, in 
the ordinary sense, during the period of the " Restriction " j 
yet, though they ceased to be convertible in 1797, the first 
instance, so far as I am aware, of a refusal to accept such 
notes in payment of debts, was that of Lord King, in 1811 ; 
and this refusal took place, as Lord King claimed, not from 
any selfish motive, but purely in order that, by strongly 
attracting public attention to the unfortunate monetary condi- 
tion of the kingdom, he might promote the resumption of 
specie payments. 

During the circulation of the legal tender greenbacks in 
the United States, every person who wished to make contracts 
for future payments in terms of gold or silver, was at liberty 
to do so ; yet it is notorious that few took advantage of their 
legal right in this respect. That which had become, no • 
matter how, the current money of daily use became, for that 
reason alone, the almost universal standard of deferred pay- 
ments. 

It is another question whether paper money performs this 
function with justice to debtor and creditor, or with advan- 
tage to the general community. That question we shall meet 
further on. 

212. "What Determines the Value of Paper Money? — 
What determines the value of any kind of money ? What 
determines the value of any thing? Demand and supply. 
The demand for money is, as we saw (par. 170), the amount 
of money-work to be done, the amount of exchanging requir- 
ing to be effected through the use of money. The supply of 
money is the money-force available to do the money- work. 
It is compounded of the volume of the circulating money and 
the rate of circulation. Supposing the occasion for the use of 
money — the demand — to remain the same, and the rate of the 
circulation of paper to be the same as that of metal, the value 
of a body of paper money would be the same as that of a 
body of money consisting of as many pieces of metal as there 
were pieces of paper, the pieces being of the same " denomina- 
tions," whether stamped with the mint-press or the printing- 
press. 



INCONVERTIBLE PAPER MONEY. 159 

We said : " Supposing the rate of circulation of paper to be 
the same as that of metal." I am aware of no reason for 
supposing that any difference in the rate of circulation of 
metal money, on the one hand, and of paper money on the 
other, would exist, if all other conditions were alike, of suffi- 
cient importance to be taken into account. The paper would, 
of course, be handled somewhat more easily, would be remitted 
by mail or parcel-delivery somewhat more readily and safely, 
and thus a thousand dollars, so-called, in paper would do 
somewhat more money- work than a thousand dollars in metal. 
The difference in that respect would, however, not be 
important. 

We may accordingly drop this proviso. We also said : 
" Supposing the occasion for the use of money — the demand 
— to remain the same." Will the demand for money be 
affected by the substitution of paper for metal ? The popular 
opinion undoubtedly is that the mere fact of the emission of 
inconvertible paper produces discredit, so that such money, 
irrespective of any excess, at once becomes distrusted and 
avoided. 

213. Depreciation not a necessary consequence of Incon- 
vertibility. — The opinion above stated is unfounded. We 
saw (par. 201) that depreciation is not a necessary result of 
debasement of the coin. Not only will the same line of 
reasoning establish the proposition that depreciation is not a 
necessary result of the issue of inconvertible paper ; but his- 
torical instances not a few exist of such paper money main- 
taining itself for a time in circulation without discredit and 
without depreciation. It is undoubtedly true, as Prof. Bona- 
my Price asserts, that " experience has proved that it need 
not of necessity suffer any depreciation of value."* 

* On a point so vital it may be well to add authority to reason, espe. 
daily as current American literature misrepresents the real purport of 
economic opinion on this subject. 

Mr. Thomas Tooke, the most eminent economic statistician of the 
world, explicitly and repeatedly states that depreciation is not a neces- 
sary consequence of inconvertibility. 

Mr. James Wilson, founder of the London Economist, and a states- 



160 POLITICAL ECONOMY. 

214. Inconvertible Paper always issued as Cheap Money. 

— The moving cause in the issue of inconvertible paper money- 
has been its cheapness, as compared with the metal money 
which it has replaced. Whatever excellencies may have been 
reflectively discovered in such money after it had come into 
circulation, I am not aware that the institution of such money 
has been due, in an individual instance, to any other virtual 
reason than that which has been expressed. 

We saw that the sovereign first pinched the coin, say, one 
per cent., under the name of seigniorage, to meet the cost of 
coinage, and then, finding the opportunity too tempting, took 
out it might be five, it might be fifteen per cent., or even 
more, for his own benefit. The issue of paper money, is in 
effect, the exaction of a seigniorage of one hundred per cent. 
At times, that exaction has been made in cold blood, at the 
dictate of avarice ; at times, and indeed, more often, the 
exaction has appeared to be justified, if not sanctified* by 
some great exigency of national life. 

man and financier of wide experience, declares that if the amount of 
inconvertible paper be properly regulated, " there is no reason whatever 
why such notes should suffer depreciation." 

M. Courcelle-Seneuil, a French writer on Finance, whose views are 
entitled to much consideration, expresses the opinion that if the emis- 
sions of paper money be moderate, they may have the same value as 
metallic money. 

I have made use of three names of the first rank in the economics of 
finance. Let me now quote, at greater length, the most illustrious writer 
known to monetary science. 

" The whole charge for paper money," says Mr. Ricardo, " may be 
considered as seigniorage. Though it has no intrinsic value, yet by lim- 
iting its quantity, its value in exchange is as great as an equal denom- 
ination of coin, or of bullion in that coin. It is not necessary that paper 
money should be payable in specie to secure its value ; it is only neces- 
sary that its quantity should be regulated according to the value of the 
metal which is declared to be the standard." 

* Hence the phrase the "the blood-stained Greenback." Lest I should 
be misunderstood, let me say that it is my firm belief that the issue of 
inconvertible paper money is never a sound measure of finance, no mat- 
ter what the stress of the national exigency may be. I believe it to be as 
surely a mistaken policy as the resort of an athlete to the brandy bottle. 
It means mischief always. If there is ever a time when a nation needs 



IS BAD MONEY, CHEAP MONEY f 161 

215. Without any such stress of fiscal necessities as those 
caused by war, paper money has been frequently issued by 
governments as a fiscal resource, to enable public works to be 
created, to meet an unexpected deficiency of revenue, or even, 
as in the case of some of the early American colonies, to set 
bounties on manufactures or the fisheries. There is always a 
great temptation, to statesmen and to people alike, in times of 
emergency, in the knowledge that it is possible to replace a 
money of high cost by a money of low cost, of cost, indeed, 
so small that it may be called no cost. 

216. Is it really Cheap Money ?— That depends on whether 
it be good money or not. The money function is so import- 
ant, so vital, in the industrial system, that there can be no 
true economy in any money but the very best. If the first 
cost of money can be saved, in whole or in part, without loss 
of efficiency or safety, that course is unmistakably dictated by 
the same law of the human mind which impels the individual 
to go to his object by the shortest path, or to buy in the cheap- 
est market. To use a money which has to be dug out of the 
depths of the earth, drilled and blasted out of rockj perhaps at 
the depth of two thousand feet where water almost boils 
from internal fires, when a money in everyway as good could 
be made from paper-pulp and printed with a steam press, 
would be the extreme of wastefulness. On the other hand, 
to use any but the best money, that which will perform the 
money function in the most perfect manner, would be economy 



its full collected vigor, with a steady pulse, a calm outlook, a firm hand, 
a brain undisturbed by the fumes of this alcohol of commerce — paper 
money — it is when called to do battle for its life with superior force. It 
is to my mind the highest proof of the supreme intellectual greatness of 
Napoleon, that, during twenty years of continuous war, he never was 
driven to this desperate and delusive resort. I hold any man to be some- 
thing less than a statesman, in the full sense of that word, who, under 
any stress of fiscal exigency, supports or submits to a measure for the 
issue of paper money not convertible, at the instant, on demand, without 
conditions, into coined money. The political arguments by which such 
measures are always supported, on the outbreak of war, seem to me the 
veriest trash, due half to ignorance, and half to cowardice. 



162 POLITICAL ECONOMY. 

of the same sort and degree as putting rotten timbers into a 
bridge because they were cheaper than sound timbers. 

217. Is it, then, Good Money?— I know of nothing in the 
history of inconvertible paper money to indicate that such 
money, when issued of a denominative value not to exceed 
the mint-value of the coin which would have circulated in the 
community under the law for the territorial distribution of 
money which has been stated (pars. 176-80), may not serve as 
the general medium of exchange, so far as the internal* trade 
of a country is concerned, in every way as satisfactorily as the 
coin itself. Indeed, if any preference exists, it will be in favor 
of the paper money, as more convenient to handle, more 
readily transported, more successfully concealed. 

Moreover, it has, I think, been sufficiently shown that what- 
ever acts as the general medium of exchange, in the very act 
of doing this performs the function of a common denominator 
of values, furnishing a price-current in which the values of all 
commodities are expressed in terms of that one article. 

But as regards the function of a standard for deferred pay- 
ments, a wide difference may exist between two articles which 
might, with equal convenience, be used as the medium of 
exchange. It might happen that an article having a decided 
preference in the latter function would be found far inferior 
in the former function ; might even be miserably deficient in 
the requisites of a standard of deferred payments. Let us, 
then, inquire further respecting inconvertible paper money, on 
this score. 

218. Inconvertible Paper Money as the Standard of 
Deferred Payments.— In the fact that this money has no 
natural cost of production, lies the possibility, not merely of 
gross injustice as between individuals and classes of the com- 
munity (which is not an economic consideration), but also of 
grave industrial evils, and even disasters of the most appalling 
character. Mr. Ricardo has rightly said that, by limiting the 
supply, any degree of value can be given to the money of a 
country, be it of gold and silver or of paper ; but in the case 

* The relations of inconvertible paper money to foreign trade and 
international exchanges will be spoken of in paragraph 220. 



EXCESS OF PAPER ISSUES, 163 

of the last no limitation of the supply is set by natural forces. 
Paper money has no cost of production. The expense of 
printing a dollar bill is so small, that, for purposes of eco- 
nomic reasoning, it may be disregarded altogether, while the 
expense of printing a ten-dollar bill or a hundred-dollar bill 
or a thousand dollar bill is no greater. The limitation of sup- 
ply in the case of such money, therefore, must be left to law, 
convention, or accident. 

We have seen that it would require many years of highly 
stimulated production to affect appreciably the world's stock 
of the precious metals, and, by consequence, the value of those 
metals. The cereal grains, indeed, being consumed in one or 
two years after their production, may be increased in quantity 
more rapidly, say, twenty or thirty per cent, in a year, as the 
result of exceptionally abundant harvests ; yet even here 
human volition only controls the elements of production to a 
limited extent ; and increase on such a scale could not be car- 
ried forward more than two or three years at the furthest. In 
the case of paper money, however, the stock may be increased, 
at the will of the issuer, to any extent, within the briefest 
period. The quantity may be trebled, decupled, centupled, 
by the operations of the printing-press. 

219. Domestic Effects of Inflation. — The value of money 
depending, as has been shown, upon the relation of supply to 
demand, an increase of issues implies a loss of value in each 
given quantity of money. This involves a corresponding loss 
to all creditors, and a corresponding gain to all debtors. 
That result, being brought about by legislation or by the act 
of the prince, is properly termed confiscation. So far as it 
concerns only the existing body of debts, the question of con- 
fiscation is of interest only from the point of view of political 
equity. But such a measure also becomes a highly destructive 
force within the field of present and future industry, dealing a 
grievous blow at the instincts of frugality in the individual, 
and at the organization of the industrial body for the purposes 
of production and exchange. 

Such a blow once dealt might in time be recovered from ; 
but if new fiscal exigencies of the government, or the political 



164 POLITICAL ECONOMY. 

pressure of the debtor class draw out other issues of incon- 
vertible paper, not only will the value of the money continue 
to sink, through excess of supply, but another cause will begin 
to work in the same direction. The money demand will re- 
ceive a shock such as has been described in par. 200, which 
may operate slowly and continuously, or may produce a sud- 
den collapse of the circulation, the treasury crowding out the 
paper upon a reluctant and indignant people, who will none of 
it ; who, through experience of grave losses in the past, shun 
it as they would the plague, contracting their industry, or 
changing its form at whatever sacrifice, or resorting to barter 
in spite of all its inconveniences, to avoid the use of the de- 
tested money. This was the fate, at the last, of the American 
" Continental Currency," and of the "Assignats " and " Man- 
dats " of the French revolution. 

Such are the possibilities attending the issue of paper 
money by the government. It may be asked what are the 
probabilities of the case ? As we have here reached the 
limit of strictly economic inquiry, I prefer to postpone our 
answer to this question to Part VI. , where, under the title 
" Political Money," the subject will be briefly treated in its 
political and historical aspects. 

220. Inconvertible Paper Money and Foreign Exchanges. 
— But before we leave the topic of inconvertible paper money, 
we have to view another phase, viz., its relation to Inter- 
national Exchanges. Thus far, we have spoken of the issue 
of paper money by government, only in its effects upon 
domestic trade and production. We are now to consider its 
influence upon the commercial relations of the issuing country 
with foreign countries. 

By the mere fact of the adoption of this kind of money, a 
country loses all the advantages of an automatic regulation of 
the money supply through the normal movements of trade. 
Paper money finds no outlet in international commerce. It 
can not be exported and retain its value. Hence its regula- 
tion becomes purely mechanical. Having no natural cost of 
production, it will not, if in excess in any country, flow away 
in obedience to the law which governs the distribution of a 



PAPER MONEY AND FOREIGN EXCHANGES. 16$ 

money having acceptance abroad equally as at home. If 
issued in excess, it can only be removed by being pumped 
out by the same force which originally issued it. 

Even where the excess of such paper money, over what 
would have been that country's distributive share of the 
world's money, be not enough to produce grave disturbances of 
domestic industry, the effect on foreign trade will yet be 
momentous. The immediate result of any excess must be to 
establish a premium upon that metallic money in which alone 
foreign balances can be paid. 

To one who is not familiar with the largest operations of 
commerce this may seem a small matter ; yet, if we may 
trust those who are best qualified to decide such questions, 
the money of a commercial state can not depart, by the nar- 
rowest interval, from the money in which international bal- 
ances are discharged, without creating obstructions, exciting 
apprehensions and even occasioning losses, to which modern 
trade, with its highly developed and acutely sensitive organ- 
ization, will not submit, or will do so only upon the payment 
of heavy fines by the offending community. 

During the German war, and for some years after, viz., 
from 1871-1877, the notes of the bank of France were incon- 
vertible ; yet such was the sagacity and prudence of the 
directors of that institution that at no time was there any 
considerable discount on that money, the premium on gold 
being often but a small fraction of one per cent. Yet, slight as 
was the disturbance of the domestic circulation, Mr. Bagehot, 
in his standard work, Lombard Street, written during the period 
of suspension, attributes to it the most momentous consequences. 

" The note of the bank of France," he says, " has not, indeed, 
been depreciated enough to disorder ordinary transactions. 
But any depreciation, however small, even the liability to 
depreciation, without its reality, is enough to disorder exchange 
transactions. They are calculated to such an extremity of 
fineness, that the change of a decimal may be fatal, may turn 
a profit into loss. Accordingly London has become the sole 
great settling-house of exchange transactions in Europe, 
instead of being, as formerly, one of two." 



1 66 POLITICAL ECONOMY. 

CHAPTER VI. 

BANK MONEY. 

221. The Characteristics of Bank Money.— To secure the 
.superior convenience of paper money, and, in a degree, also, its 
cheapness, as contrasted with money of metal, while retaining 
the comparative stability of value which characterizes the latter, 
and to keep the local circulation in such close communication 
with the general circulation of commerce as to insure the 
automatic regulation of the money supply, bank money has 
been invented. 

The essential characteristic of such money is that the paper 
is instantly convertible, on the demand of the holder, into 
coined money. Whenever, by the unrebuked and unpunished 
lapse of the banks issuing paper money, as so frequently in the 
early history of the United States, or by the action of govern- 
ment upon its own initiative and for its own purposes, the 
money so issued fails to be convertible to the full extent indi- 
cated, it becomes inconvertible paper money. Nothing entitles 
paper to be called bank money except full, instant, uncondi- 
tional redemption in coin. There is no stopping-place between 
this condition and inconvertibility. 

Generally speaking, this sort of money is issued by institu- 
tions which, whether under State patronage or not, are so far 
disconnected from the government that their officers and 
agents can be sued in courts, and their assets and effects be 
attached for the recovery of the amount promised by the 
bank notes to be paid on demand. In this matter of connec- 
tion with the State, however, there is found among banks, 
in one country or another, every degree from least to largest. 
In some instances the true character of bank money has 
been preserved in the case of institutions having what 
would appear a dangerously close connection with govern- 
ment. 

222. The Origin of Bank Money. — Bank money in its 
modern form was first issued in Sweden, in 1658. The Bank 
of Scotland issued £1 notes as early as 1704, while the Bank 



BANK MONEY. 167 

of England did not issue notes below £20 prior to 1759. The 
issue of bank money, proper, did not begin in America until 
after the revolution, although nearly every colony had been, 
at one period or another, deluged with inconvertible paper 
money. The great bank money countries of to-day are the 
United States and the States of Northwestern Europe. 

223. The Coin Basis of Bank Money. — We have said 
that, in addition to the superior convenience of bank money 
over coin, the motive for issue is found in its comparative 
cheapness. Banking experience has shown that a much larger 
denominative amount of notes can be kept in circulation than 
is held of specie for redemption. 

On all this excess, the issuer of the notes derives a profit 
which is measured by the rate of interest on his loans, after 
deduction is made of the expense of maintaining the service. 
The metal thus displaced from circulation is exported, or 
melted down for use in the arts. 

The advantage to the community of this saving in the cost 
of the money used in effecting exchanges, is thus conceived 
by Adam Smith. 

" The gold and silver money which circulates in any coun- 
try may very properly be compared to a highway, which, 
while it circulates and carries to market all the grain and corn 
of the country, produces itself not a single pile of either. 
The judicious operations of banking, by providing, if I may 
be allowed so violent a metaphor, a sort of wagon-way 
through the air, enables the country to convert, as it were, a 
great part of its highways into good pastures and corn-fields, 
and thereby to increase very considerably the annual produce 
of its land and labor." 

The amount of saving effected by bank money varies, in the 
first instance, according to the proportion of coin, or " specie," 
as it is commonly called, reserved to meet demands for the 
redemption of the notes : to serve, that is, as the basis of the 
circulation. 

That proportion is different in different countries, and often 
in different banks in the same country. The most common 
legal minimum reserve is one-third. In Leipsic, before the 



1 68 POLITICAL ECONOMY. 

unification of Germany, the specie reserve was two-thirds, 
while in Bavaria it was but one-fourth. 

Before tbe war of secession, the banks of the United States 
held an absurdly small amount of specie, the proportion in 
some States falling to ten, five, or even three per cent. But 
the so-called bank money of many of the States of the Ameri- 
can Union, during certain periods in the early history of the 
nation, was really nothing but inconvertible money, hardly 
the pretense of redemption being maintained.* 

224. The Banking Principle. — The view of the operations 
of bank money which is held by the great majority of writers 
of repute, in nearly all countries, is that, when really converti- 
ble into coin on demand ; with all reasonable facilities exist- 
ing for redemption, and with redemption actually taking 
place from time to time ; with a public opinion which does 
not allow to be questioned the right of any man anywhere, 
for any reason or for no reason, to require coin, for any and 
all notes he may hold ; and with exemplary penalties,! pro- 



* Mr. Condy Raguet thus describes the action of American banks dur- 
ing this period, when in a state of suspension : 

' ' Banks, when they default in their payments, not only never ask the 
indulgence of their creditors, for any specified extension of time, but they 
do not even think themselves under obligation to pay interest to the cred- 
itors for the funds they forcibly detain from them ; nay, they frequently, 
in the midst of their insolvency, declare dividends of the very profits 
which actually belong to their creditors." 

Of an earlier period Mr. Gallatin has written : " It was the catastrophe 
of the year 1814 which first disclosed not only the insecurity of the Ameri- 
can banking system, as then existing, but also that, when a paper currency, 
driving away and superseding the use of gold and silver, has insinuated 
itself through every channel of circulation, and become the only medium 
of exchange, every individual finds himself, in fact, compelled to receive 
such currency, even when depreciated more than twenty jrw cent., in the 
same manner as if it had been a legal tender." 

f'By convertibility of the paper," says Mr. Tooke, "according to 
the ordinary signification of the term when applied to bank notes in this 
country (England), is meant that a holder of a promissory note — payable 
on demand — may require payment in coin of a certain weight and fine- 
ness, and in the event of refusal or demur, such payment is enforced by 
law against the issuer, to the utmost extent of his property. The issuer, 



BANK MONEY. 1 69 

vided by law and enforced by the courts, for the first failure 
or the slightest delay on the part of banks to make good their 
promises, such money acts in all respects precisely as would a 
body of money composed wholly of coin. It is held to be 
fully subject to the law (par. 176) which governs the terri- 
torial distribution of money consisting of the precious metals 
only ; and to have every economic virtue which belongs to 
such money, with the added advantage of greater cheapness 
and greater convenience in use. 

"We are willing," says Mr. Tooke, the leader of the school 
of economists known as the advocates of the " Banking Prin- 
ciple," whose theory I have stated, " we are willing to con- 
sider a metallic currency as the type of that to which a mixed 
circulation of coin and paper ought to conform. But, further, 
we contend that it has so conformed, and must so conform, 
while the paper is strictly convertible." 

The same opinion is expressed, with great emphasis, by Mr. 
Fullarton and Mr. James Wilson, and by M. Courcelle-Seneuil. 

225. The Currency Principle.— The view of bank money 
which has been stated in the foregoing paragraph, is that 
which is held by a majority of writers of reputation. The 
opposite opinion was maintained by a school of economists in 
England, comprising the advocates of the so-called " Cur- 
rency Principle," the leader of the school being Lord Over- 
stone. 

In the view of this school, something more than sound 
banking is needed to give a country good bank-money. If 
numerous, competing banks are left free to issue notes in 
such quantity and of such denominations as their own inter- 
ests may dictate, with such specie reserves as their own pru- 
dence alone may suggest, there will always be the probability 
and often an extreme danger of over-issue, a body of bank- 
money so composed not being wholly amenable to the law of 

whether a private or joint-stock banker, is considered to have failed. The 
circulation of his notes is at an end, and he is subject to the process 
usual in cases of insolvency." — [" History of Prices."] Compare this with 
the state of things disclosed by Mr. Raguet, in the foot-note last pre- 
ceding. 



17° POLITICAL ECONOMY. 

distribution which governs metal money, but possessing the 
capability of temporary and local inflation. 

This opinion was ably maintained by Lord Overstone, Mr. 
Norman and Colonel Torrens, against the views of the Bank 
of England, and after a long struggle, the economists of this 
school triumphed in the enactment of the Bank Act of 1844* 
which still governs the note-circulation of England, though 
the principle on which it was framed is now challenged by 
many of the best financiers and economists. 

In the United States, owing doubtless to gross abuses of 
the right of bank-note issue, such as have been adverted to in 
a note on a preceding page, the views of the English cur- 
rency school obtained an acceptance among professional 
economists and writers on finance even wider and more com- 
plete than in England, although in but few states did this lead , 
to legislation in any degree comparable, in scope or stringency 
of operation, to the English act of 1844. The leading writers 
on this question in the United States, were Messrs. William 
M. Gouge, Condy Raguet and Amasa "Walker. 

226. The Currency Principle vs. the Banking Principle. 
— The question whether a body of money composed partly of 
coin and partly of bank notes fully convertible into coin, acts 
in all respects as would a body of money composed wholly of 
coin, or, on the other hand, has the capability of being issued 
in local excess and so maintained for a long enough time to 
affect local prices, and thus initiate abnormal movements of 

* The principal features of the act of 1844, as affecting the circulation, 
are as follows : 1st. The Bank of England is allowed to issue notes, in a 
constant sum of £15,000,000, without any specie basis. For all notes 
above this, it must have, pound for pound, a specie reserve, of which 
one-fifth may be silver. [This last in consideration of the commer- 
cial and political relations of England with India, which has silver 
money.] 

2nd. The issue department and the banking department of the Bank 
are completely divorced, becoming as separate as the Customs and the 
Internal Revenue bureaus of our own government. 

3rd. No London bank can issue notes, nor can any bank chartered 
since 1844 ; while the issues of the English banks then existing 
are limited to their ordinary outstanding circulation prior to that date. 



REACTION OF EXCHANGE ON PRODUCTION. 17* 

trade and production, I regard as the one open question in the 
theory of money. Brought up in the school whieh held the 
latter view, my own reading and reflection have confirmed 
me in the belief that there resides in bank money, even under 
the most stringent provisions for convertibility, the capability 
of local and temporary inflation. The arguments on the two 
sides of the question are so evenly balanced, and the statis- 
tical evidence is so ambiguous, that differences of opinion are 
likely long to exist between men of intelligence and candor. 
I freely confess that the preponderance of authoritative 
opinion is against the view I hold. 



CHAPTER Vn. 

THE REACTION OP EXCHANGE UPON PRODUCTION. 

227. Evil Possibilities involved in the Division of Labor. 

— We have seen that the division of labor is an essential con- 
dition of large and varied production. But the division of 
labor, when carried far, involves possibilities of loss and dis- 
aster. These become more and more serious as production 
becomes more and more extended and complicated, until, in 
the most highly organized industrial state, we have to explain 
the failure of a community to realize its full productive capa- 
bility, mainly by reference to industrial misadventures and 
even, at times, a partial paralysis of the productive powers of 
the community, originating in this very source. 

The cause of the trouble adverted to is found in misunder- 
standings between producers and consumers, whom it is the 
nature of the division of labor to set apart, and, in an 
advanced industrial state, widely apart, often by half the cir- 
cumference of the globe. 

It is evident that, were there no division of labor into 
separate occupations, the relation between production and 
consumption would be a simple one. Production would, 
within the capabilities of the several agents concerned, viz., 



172 POLITICAL ECONOMY. 

land, labor, and capital, only be limited by the effective desire 
of the several individuals of the community to consume 
wealth. Each man would work by himself, for himself, pro- 
ducing those things, and those only, which he wished per- 
sonally to eat, drink or wear, or house or warm himself 
withal. There would here be no question of a market, for 
every man would be his own customer. 

From this point, we may mark off three stages of industrial 
development. 

228. The First Stage. — The first is where distinction of 
trades is introduced, and men no longer consume all, or per- 
haps any part, of the articles they have produced ; yet where 
consumers live near the producer, and are personally known 
to him. In this condition, production, except in agriculture, 
generally waits for an order from the consumer. If goods 
are produced in advance of an order, the kinds are few, the 
forms are simple, the styles standard. There is, moreover, the 
reasonable expectation that some certain person, or some one 
out of a certain group of persons, will surely and soon need 
the goods, and will become the consumer. Here, we see, is 
not much liability to a misunderstanding between producer 
and consumer. 

229. The Second Stage.— The second stage is where the 
element of personal acquaintance between producer and con- 
sumer disappears. Production no longer waits for orders, 
but anticipates demand. Goods are produced for a general 
market, and upon a calculation of the quantity probably to 
be required. The individual producer has no longer his own 
circle of customers ; but competes with other producers for 
the largest possible share of the patronage of a wide circle of 
consumers. Yet it is still true that production is carried on 
by artisans working singly or in small groups. Tools and 
implements are simple and inexpensive ; there is little of 
" plant " or fixed capital. Fashions are few and styles remain 
standard through long periods of time. Here, manifestly, the 
opportunity for misunderstandings between producer and con- 
sumer exists in a higher degree than under the former condi- 
tions described. Yet even here production may still go on 



REACTION OF EXCHANGE ON PRODUCTION. 173 

with tolerable uniformity: all hands working steadily through 
all the seasons of the year, with a reasonable assurance that 
all goods which are well made, will find a market at fairly 
remunerative prices. 

230. The Third Stage — The third stage is reached, when 
increasing facilities of communication make the world one 
trading community. Then production becomes highly diversi- 
fied, and the specialization and localization of trades proceed 
so far that one country, or perhaps one group of towns, pro- 
duces the greater part of all the goods of a certain sort which 
are consumed throughout the world. Then luxury and refine- 
ment of living are carried to the maximum, so that not only 
are classes of goods multiplied almost indefinitely, but fashions 
and modes enter till standard styles almost disappear, each 
season bringing minute modifications of demand which are 
not to be satisfied except by an exact compliance, even the 
colors and shades of one year becoming intolerable the next. 

It will appear that conditions like the foregoing increase 
enormously the liability of misunderstanding between pro- 
ducers and consumers. The possibilities of error in supplying 
the markets, no longer of a village, but of the world, become 
tremendous. 

231. The Appearance of the Entrepreneur. — But it must 
further be added, that powerful and complicated machinery is 
now introduced, and costly structures and "plant" are re- 
quired. Great numbers of operatives, of both sexes and all 
ages and of every degree of strength and skill, have to be 
gathered under one roof, each knowing only his or her own 
part ; all requiring to be instructed and equipped, organized, 
energized, and directed by the intelligence and will of one 
man. In other words, we have reached the entrepreneur stage 
(pars. 106-9) of industrial development. 

The introduction of the principle of mastership into indus- 
try makes a great gain of productive power ; but this gain is 
not secured without an appreciable loss. The entrepreneur 
(to anticipate, for a moment, a topic in Distribution), finds 
his motive for organizing and conducting the great enterprises 
of modern industry in the profits (pars. 302, 429) which he 



174 POLITICAL ECONOMY. 

hopes individually to realize. His entire personal interest i& 
found here. It is, perhaps, to secure a net profit of twenty 
thousand dollars, that he leases land and buildings, and bor- 
rows capital, and hires the labor requisite to achieve an annual 
product of half a million of dollars. If, then, the conditions 
of trade and industry are such as to destroy for the time his 
profit ; much more if they are such as to threaten a loss which 
will impair the integrity of the capital, his interest in pro- 
duction is greatly diminished, if not destroyed. He will 
either cease producing entirely, or, which is more likely, will 
contract the scope of his operations. "Were he to produce 
$500,000 worth, as heretofore, a small fraction of his stock 
unsold might sweep away his own gains for the year, or leave 
a deficit ; whereas, were he to produce but $400,000 or 
$350,000 worth, he would probably dispose of his stock at 
prices high enough to make himself good and perhaps leave a 
small margin of profit, while holding his laboring force and 
his customers together. 

232. Fluctuations in Production. — Such being the con- 
ditions under which production takes place, under the modern 
organization of industry, we note that there is in the nature 
of the case a continuous loss through the failure of the pro- 
ducing body to meet, promptly and precisely, the demands of 
the body of consumers. Wherever, from any cause, there is a 
failure correctly to anticipate those demands and supply them 
perfectly, in time, in degree, in form, loss of value results. 
That there should be such failure in part, is inevitable. 

But the loss which we had chiefly in view in beginning this 
chapter, and with reference to which we have written this 
long introduction, is not the steady, continuous loss of value 
due to the inability of those who direct production to com- 
prehend, fully and seasonably, the varying demands of distant 
markets. It is the occasional loss resulting from the frequent 
and often furious fluctuations which are involved in the 
modern organization of trade and industry. 

From that organization the alternation of highly stimulated 
and of deeply depressed production appears to be inseparable. 
The course of trade and industry through the cycle which the 



THE COMMERCIAL CRISIS. 175 

conditions of modern life seem to have established, is so well 
described by Prof. Alfred Marshall that I can not forbear to 
give it in full : 

"The beginning of a period of rising credit is often a 
series of good harvests. Less having to be spent in food, 
there is a better demand for other commodities. Producers 
find that the demand for their goods is increasing, they 
expect to sell at a profit, and are willing to pay good prices 
for the prompt delivery of what they want. Employers com- 
pete with one another for labor ; wages rise ; and the employed 
in spending their wages inci'ease the demand for all kinds of 
commodities. New public and private companies are started, 
to take advantage of the promising openings which show 
themselves among the general activity. Thus the desire to 
buy and the willingness to pay increased prices grow 
together ; credit is jubilant and readily accepts paper prom- 
ises to pay. Prices, wages and profits go on rising ; there is 
a general rise in the incomes of those engaged in trade ; they 
spend freely, increase the demand for goods, and raise prices 
still higher. Many speculators, seeing the rise, and thinking 
it will continue, buy goods with the expectation of selling 
them at a profit. At such a time a man who has only a few 
hundred pounds can often borrow from bankers and others 
the means of buying many thousand pounds' worth of goods ; 
and every one who thus enters into the market as a buyer, 
adds to the upward tendency of prices, whether he buys with 
his own or with borrowed money. 

" This movement goes on for sometime, till at last an enor- 
mous amount of trading is being carried on by credit and with 
borrowed money. Old firms are borrowing, in order to extend 
their business ; new firms are borrowing in order to start 
their business ; and speculators are borrowing, in order to buy 
and hold goods. Trade is in a dangerous condition. Those 
whose business it is to lend money are among the first to 
read the signs of the times ; and tbey begin to think about 
contracting their loans. But they can not do this without much 
disturbing trade. If they had been more chary of lending at 
an earlier stage, they would simply have prevented some new 



176 POLITICAL ECONOMY. 

business from being undertaken ; but when it is once under- 
taken, it can not be abandoned without a loss of much of the 
capital that has been invested in it. Trading companies of all 
kinds have borrowed vast sums with which they have begun 
to build railways and docks and ironworks and factories ; 
prices being high they do not get much building done for their 
outlay ; and though they are not yet ready to reap profits on 
their investment, they have to come again into the market to 
borrow more capital. The lenders of capital already wish to 
contract their loans ; and the demand for more loans raises the 
rate of interest very high. Distrust increases ; those who have 
lent become eager to secure themselves and refuse to renew 
their loans on easy or even on any terms. Some speculators 
have to sell goods in order to pay their debts ; and by so doing 
they check the rise of prices. This check makes all other 
speculators anxious, and many rush in to sell. For a specula- 
tor who has borrowed money at interest to buy goods may 
be ruined if he holds them a long time even while their price 
remains stationary ; he is almost sure to be ruined if he holds 
them while their price falls. When a large speculator fails, 
his failure generally causes that of others who have lent their 
credit to him ; and their failure again that of others. Many 
of those who fail may be really ' sound,' that is, their assets 
may exceed their debts. But though a man is sound, some 
untoward event, such as the failure of others who are known 
to be indebted to him, may make his creditors suspect him. 
They may be able to demand immediate payment from him, 
while he can not collect quickly what is owing to him ; and the 
market being disturbed he is distrusted ; he can not borrow, 
and he fails. As credit by growing makes itself grow, so 
when distrust has taken the place of confidence, failure and 
panic breed panic and failure. The commercial storm leaves 
its path strewn with ruin. When it is over, there is a calm, 
but a dull, heavy calm. Those who have saved themselves are 
in no mood to venture again ; companies whose success is 
doubtful are wound up ; new companies can not be formed. 
Coal, iron and the other materials for making fixed capital 
fall in price as rapidly as they rose. Iron works and 



PERIODICITY OF PANICS. 177 

ship« are for sale, but there are no buyers at any moderate 
price. 

" Thus the state of trade, to use the famous words of Lord 
Overstone, ' revolves apparently in an established cycle. First 
we find it in a state of quiescence — next improvement, growing 
confidence, prosperity, excitement, overtrading, convulsion, 
pressure, stagnation, distress, ending again in quiescence.' " 

233. Periodicity of Panics.— So frequently have trade and 
industry made this weary round, that the writers on finance 
have undertaken to establish the law of the periodicity of 
panics and hard times. The term of ten years is that most 
often fixed upon for the completion of the cycle. There is at 
least a very curious series of coincidences to give some sub- 
stance to this hypothesis. 

But whether there are, indeed, forces operating which bring 
about commercial convulsions and industrial distress at regu- 
lar intervals, or not, it seems clear that, under the conditions 
depicted in the first part of this chapter, it is inevitable that 
the producing and exchanging body should alternate fre- 
quently and even violently between a state of depression and 
partially suspended activity, and a state of highly animated, 
excited, almost convulsive exertion, in which the agencies 
alike of production and of exchange are strained to their ut- 
most to meet demands which are stimulated to the highest 
extravagance by a universal passion of speculation. 

234. Loss of Productive Force. — It is evident that this is 
not an order of things under which the largest production of 
wealth takes place. The two extremes do not offset each 
other, with the same result as if production had been proceed- 
ing calmly and equably through the entire period. On the 
contrary, each extreme involves great and permanent loss of 
productive force. There is much misdirection of energy, 
much waste of material, much vital injury to labor power and 
capital power, in the haste and strain and fever of highly 
stimulated effort. 

On the other hand, the long, dull spell of inactivity that 
succeeds is not given wholly to recuperation of exhausted en- 
ergies, renewal of stocks of materials, repair of machinery and 



178 POLITICAL ECONOMY. 

plant. It is not a waste of time, merely, involving a propor- 
tional loss of productive power : that inactivity becomes itself a 
cause of mischief. It induces in the working classes a lethargy, 
a despondency, a recklessness, which are forces productive of 
evil. It generates habits of lounging and of drinking, perhaps 
of tramping, which may not be shaken off even with renewed 
employment. 

235. "Hard Times." — Nothing needs to be added, of 
clearness or of force, to Prof. Marshall's statement of the 
course which trade and industry run from the time they first 
cross the line of reviving prosperity to the moment they 
plunge into the abyss of broken credit, falling markets, com- 
mercial panic, failing banks, and general distress. But there 
is one industrial phenomenon of great significance in respect 
to our question, why the actual production of a community 
comes so far short of its productive capability ? which econo- 
mists have not been accustomed to explain : this is, the long 
continuance of the periods of industrial depression and of 
restricted production. 

It will readily appear that, after running such a rig as has 
been described, the agencies of trade and industry will require 
time to refit. The track must be cleared of the wreck. The 
places left vacant by the casualties of the great crash must be 
filled by new men. But the actual time covered by the period 
of depression is sometimes much longer than can be accounted 
for by the mere loss and destruction of a panic. "Hard 
Times " are protracted long after the capital power and the 
labor power of the community are in condition to resume their 
interrupted functions. 

For several years after the panic of 1873, in the United 
States, industry did not reach its former proportions. During 
that period vast amounts of labor power and capital power 
remained unproductive. Tens of thousands, if not hundreds 
of thousands, of laborers were unemployed ; an even greater 
number were employed only on half or three-quarters time. 
Hundreds of furnaces were out of blast ; thousands of water- 
wheels ceased to turn ; thousands of engines stood still. Yet, 
during this time, these workmen had occasion to consume 



THE INDUSTRIAL CRISIS. 179 

food and clothing for themselves and their families ; needed to 
work to earn the means, and were honestly willing, yea, heart- 
ily desirous to work. All this time the owners of capital 
were ready to secure a return for their investments, if they 
could find opportunity ; the conductors of business were eager 
to win a profit by employing their abilities and experience in 
productive industry. Why, then, was it, when all were will- 
ing to work and needed to work, that they did not work ? 
What was the force that kept these laboring men, these 
water-wheels and engines, these capable conductors of busi- 
ness, idle so long ? 

236. Diversified Production. — We have seen that, as so- 
ciety makes progress toward a minuter organization of indus- 
try, productive capability is enhanced, but that, coincidently, 
at each stage, the opportunities for misunderstanding between 
the body of producers and the body of consumers are greatly 
multiplied, while labor power and capital power fall more 
under the control of men of exceptional abilities, with whom 
comes to rest all initiative in production. 

Now, if we examine the list of articles sold in the market, 
in a modern community, we shall find some of them supplying 
wants which are constant and vital. We shall find others 
which minister to the most delicate tastes or gratify only the 
merest casual fancies. In a country like England, France, or 
the United States, tens of thousands of laborers are employed 
in producing articles of the most trivial character: fireworks, 
toys, bonbons, fripperies of dress, while hundreds of thousands 
more are employed in producing articles deprivation of which 
would not induce cold or hunger, or impair health, or be 
incompatible with public decency or personal self-respect. 

237. Propagation of Economic Shocks. — Let us suppose, 
as the result of a period of prosperity, the variety of products 
to have been carried to a very high point, when a disaster, 
primarily affecting either industry or trade, it matters not, 
befalls a community. It may be a great fire, or a great flood, 
or an epidemic of yellow fever, or the destruction of some 
leading crop. No matter where it comes from, or where it 
first strikes, the immediate effect is to diminish the productive 



180 POLITICAL ECONOMY. 

power of the community, as a whole. At once the consump- 
tion of those articles which are least essential to comfort and 
decency is checked. If we suppose the thousands of articles 
known to the market to form twenty-six groups, A to Z, their 
utility to the consumer regularly declining from the top of 
the list to the bottom, we may assume that the first effect of 
the calamity will be to reduce the consumption of articles 
forming groups X, Y and Z. No matter, as we said, where 
the blow first falls, the laborers affected produce for the time 
less, and must limit their own consumption accordingly, 
which they do by restricting their use of articles below W. 

The labor and capital employed in groups X, Y and Z, 
can not easily or soon be transferred to other groups. The 
laborers, especially, find that the present is no time to seek 
employment in other avocations. They must stay where they 
are, and do the best they can there. Hence they find them- 
selves employed on part time, and at reduced wages. The 
sums they formerly earned were expended in purchasing 
articles all the way from A to Z. In their sudden poverty 
they are obliged to cut off their own consumption of all 
articles except those which are necessary to comfort and 
decency, say from A to M, inclusive. 

But this action of producers X, Y and Z involves a 
diminished demand for products, N to W. Each group of 
producers, at this end of the line, are obliged to curtail still 
further their consumption of articles X, Y and Z, while pro- 
ducers from S to W begin to restrict their use of articles 
below T. This action, however, becomes at once the cause of 
new effects. The unfortunate representatives of X, Y and Z 
are now obliged wholly to deny themselves all products from 
H downwards ; producers T to W, in turn have to give up 
indulgence in products below N ; producers N to S, in conse- 
quence, no longer purchase products below R. 

The shock next reaches groups I to M, who have to diminish 
their consumption, to correspond to the reduced demand for 
their own products ; X, Y and Z are now glad to get enough 
of A, B, C and D to barely subsist upon ; while S, T, p, U, 
V and W carry their retrenchment upwards, till they stop at 



AGGRAVATION OF ECONOMIC SHOCKS. i-8l 

M. And so the movement goes forward until the favored 
producers A to D — favored, in that the articles they produce 
are of vital importance — experience some diminution of de- 
mand, and, producing less in consequence, have less to give in 
exchange for the products of others. So a stone, thrown into 
a lake, sets in motion a wave which extends outwards in all 
directions till it reaches the bank, even in the most retired 
nook along the shore. 

238. Aggravation of Economic Shocks. — It is evident 
that, were the community perfectly intelligent and self-pos- 
sessed, the ultimate result of this play of forces would be the 
distribution of the whole initial shock over the entire produc- 
ing body. No addition would be made to the shock as the 
movement proceeded, and the effect upon each successive 
group of producers reached would be less and less. Those 
producing articles the most essential to life, health and social 
decency would suffer to hardly an appreciable extent, as the 
wave set in motion by the rock thrown into the lake becomes 
the merest ripple against the shore. 

This is all that is necessarily involved in the propagation, 
through economic media of perfect elasticity, of an original 
blow like that assumed. In fact, industrial injuries are at 
times distributed in this way throughout the producing body, 
without panic, without apprehension, even without observa- 
tion. 

Let, however, the shock be sharp and severe, and com- 
municated in some startling form, and let it occur when the 
public mind is in an apprehensive mood, or when the com- 
mercial body is unstrung by political or social disturbances, 
and we may see the impulse propagated with increasing force, 
from subject to subject, till the movement acquires fearful 
violence. 

239. The Industrial Panic — The commercial panic we 
are all familiar with, by experience or report. We know how 
some slight cause, acting on the fears and imaginations of 
men, will overthrow the financial structure of a nation in a 
few weeks, perhaps days, prostrating the proudest houses, 
and spreading ruin far around. There is nothing that can 



1 82 POLITICAL ECONOMY. 

stand against panic. One man's fear makes another man 
afraid. One man's fall brings down another, who, but for 
that, might have stood firm ; and thus the mischief proceeds, 
from bad to worse. So much for the trading body. 

The progressive aggravation and acceleration of the forces 
of mischief throughout the producing body takes place not 
less surely, though it is here less ostensive. 

A manufacturer feels the demand for his goods fall off 
somewhat. In ordinary times he would receive the fact as an 
intimation to reduce his production, but only to a correspond- 
ing extent. Indeed, in good times he would receive that 
intimation in a somewhat skeptical spirit. He would not be 
disposed to believe that any serious check was to be ex- 
perienced. He would look to see trade start up again, and, in 
this mood, would reduce his production somewhat less than . 
correspondingly. To that extent, he would speculate : that is, 
would anticipate events and discount the future. For the 
moment, then, he would transmit the shock, not aggravated 
but mitigated. 

But let the shock be at first severe, and let it come upon 
the public mind in a suspicious mood, and the matter will take 
another turn. The merchant feels the demand for his goods 
fall off abruptly. He fears there is more to come. He is 
determined not to be caught with a large stock on his hands, 
and, in his orders to the manufacturer, he exaggerates the 
natural and proper effect of the change in the market. The 
manufacturer, on his part, knows nothing directly of the 
actual falling off in demand. He only learns it as it comes to 
him heightened by the apprehensions of the merchant. In 
his turn, he exaggerates the evil and reduces his production 
more than proportionally. His anxiety now is, not to make 
a profit, but to avoid loss. He knows he will be safe if he 
runs his mill on half or three-quarters time. 

And it is here that the cause indicated in par. 231 begins 
to operate with great and destructive force. The entrepre- 
neur's personal concern in production being derived wholly 
from his contemplated profit, which may be but a small per- 
centage of the value of the goods produced, his individual 



HOW FAR MAY THIS GO? 183 

interests may, for the time, become divorced from those of 
his laborers or of the general community. In his anxiety to 
save himself, he may act with as much needless cruelty as 
men do when panic-stricken in a fire or a wreck. 

240. But the action of manufacturer Z, whether wisely or 
unwisely taken, becomes, as we have seen, an element in the 
conditions of production for all the lower letters of the 
alphabet. As he pays less wages, his workmen have less to 
spend for the products of other branches of industry. The 
merchants in these lines, feeling the falling off in demand, 
exaggerate it in their orders to manufacturers, especially 
manufacturers X and Y. These, in turn, apprehensive of 
worse to come, curtail their operations more than correspond- 
ingly, and so the movement proceeds, with increasing 
violence. 

And, let us repeat, however unnecessary Z's action in 
reducing his production below a certain point, yet, if he 
actually does so, that action makes a corresponding reduction 
in X and Y's operations a necessity of their situation : just as 
truly so as if Z had a good reason for what he did. And if, 
in turn, X and Y become alarmed, and overdo the thing, that 
of itself constitutes an obligation upon manufacturers higher 
in the alphabet to cut down work and wages. 

241. How Par may this be Carried ? — Two questions arise 
upon this view of the power of apprehension and suspicion to 
aggravate the force of any industrial or financial shock. The 
first : how far may it be carried ? the second, how long may 
it last ? 

May the movement to check production proceed until all 
industry is locked fast in " a vicious circle " : no one produc- 
ing, because others will not consume, while no one is able to 
consume the products of others because he himself produces 
nothing with which to buy them ? 

I answer, no. The staple industries, especially those yield- 
ing the necessaries of life, will never be suspended. The 
demand for their products is so constant and certain that 
panic has little power over them. Groups A to D will, there- 
fore, continue to produce nearly as much as before ; not, 



1 84 POLITICAL ECONOMY. 

indeed, quite so much, because there will be individuals, 
thrown out by the revolution at the foot of the alphabet, who 
are unable to find a new place where they can produce enough 
to purchase even the barest subsistence. Groups E to H, or 
K, moreover, having to do with articles essential to comfort 
and social decency, will withstand the shock communicated 
to them sufficiently to maintain a production not very far 
below that of good times. 

Now, so long as A to D produce liberally, and E to H or 
K, still produce considerably, all persons employed within 
those groups will have the means of purchasing the products 
of groups further down the list ; and so industry will be kept 
alive, though but just alive, in those groups which produce 
articles not essential to life, or health, or decency. 

242. How Long may such a Condition Last ? — I answer: in 
theory, it may last indefinitely. Practically, it is liable to be 
terminated, after a longer or shorter period of suspense, by 
reviving courage and enterprise on the part of men of affairs, 
or through the stimulus to production administered from 
some quarter. It may be so slowly as to be almost imper- 
ceptible ; it may be so rapidly as to outrun calculation, 
that the expansion takes place. This will depend much 
on the natural temper of the community ; much on the 
immediate cause provoking renewed enterprise ; much on 
accident. 

The one essential condition is that speculation be initiated, 
that is, that men begin to look ahead, to anticipate demand, 
and to discount the future. 

One man begins to produce, no longer on orders, no longer 
cautiously and fearfully, as if it were too much to believe 
that his goods will be taken off his hands, but in a sanguine 
spirit, assuming the initiative in production, and boldly 
encountering its risks. Producing more largely, "his workmen 
have more to offer for the products of other industries, which 
is of itself a reason for a larger production in these branches, 
whose managers and proprietors respond in the same spirit. 
Finding the demand increasing, they act as if they believed it 
were about to increase still further. They produce somewhat 



HO W LONG MA V IT LAST? 1 85 

in anticipation, and thus give their hands more to offer in 
exchange for the products of still other industries. From 
day to day the movement proceeds, gathering force as it 
goes, and production swells continually under the contagious 
influence of hope and courage, just as before it shrank and 
shriveled under the breath of fear and panic. 

I have said that peculiarities of national character have 
much to do with the speedy or tardy revival of production. 
Nowhere ought recovery to be more rapid than in the United 
States. Among no people is there more of elasticity, greater 
alertness of action, more readiness to assume responsibilities 
and to run risks. Nowhere, too, does nature afford an ampler 
margin for subsistence, or more abundant material for the re- 
pair of mistakes and misadventures. 

243. Two Examples.— The history of the panic of 1857 
offers a capital illustration of the facility with which the 
American people recover from the sharpest contraction of pro- 
ductive industry, where nothing withstands the revival of 
trade, and where no second shock remains to be experienced. 
The country was in a generally sound condition, both as to 
capital and credit, when the blow fell. As the result, industry 
had scarcely shrunk to its minimum, under the influence of 
panic, when the enterprise and courage of merchants and man- 
ufacturers began to cause expansion. Within a few months 
production was again at the limits of our capital power and 
labor power. 

When the panic of 1837 came, the country was in a wretched 
condition, through the misapplication of capital and the wide 
extension of credit. 

The buoyancy of the national temper led, even at this time, 
to a speedy revival ; but the succeeding shock of 1839 threw 
the country back again, and the fear and distrust thereby en- 
gendered kept the energies of the nation in a state of partial 
repression through a long period. Such may be the influence 
of a single instance of hard fortune upon reviving industry. 

Quite as prejudicial to expanding production is the contin- 
ual apprehension of hostile or meddlesome legislation. When 
the whole body of business men are sore from disasters ; when 



1 86 POLITICAL ECONOMY. 

much of the industrial and commercial structure still lies in 
ruins, it takes but little to check the disposition again to 
adventure capital. That little is abundantly supplied by the 
popular apprehension of legislation unfavorably affecting 
money and credit. It need not be a great thing under a 
man's arms which will so increase his margin of buoyancy as to 
enable him to float for hours. It is a very small thing around 
a man's neck which will so diminish his margin of buoyancy — 
narrow at the best — as to drag him to the bottom. 



PART IV. 

DISTRIBUTION. 



CHAPTER I. 

THE PARTIES TO THE DISTRIBUTION OF WEALTH. 

244. Distribution as a Department of Political Economy. 
- — Under the title, Distribution, we inquire, what are the 
forces which divide wealth among the several persons, or 
classes of persons, who have taken part in its production ? 

In a primitive condition of society, the problem of distribu- 
tion is a simple one. Three hunters join in an expedition, and 
at the conclusion of the chase, divide their game into three 
equal parts. If boys, or cripples, or men of less than ordinary 
force or skill, are taken into the partnership, it is easily determ- 
ined what portion of a full man's share each such person 
shall receive. 

In a highly organized community, however, the division of 
the product of industry into shares corresponding to the num- 
ber of persons who have taken part in production, is a com- 
plicated problem. 

245. The Division of the "Web of Cloth. — For example, 
let us take the case of a cotton factory, at Lawrence, which 
produces in a given time a million yards of cloth. We may 
suppose that this is all woven in one piece, and that each per- 
son who has, in any way, contributed to making this giant 
web, advances in a certain order to receive his share. 

The agent for the water company first appears, and cuts off 
some thousands of yards, inasmuch as his company furnished 
the power that drove the wheels below, that turned the spin- 
dles above. Then comes the owner of the land on which the 



1 88 POLITICAL ECONOMY. 

mill is built, and carries off, perhaps, a piece five times as 
large ; next, the owner of the mill, who takes the largest piece 
of all ; next, the man who gave the use of the machinery and 
loaned the working capital, and now measures off many miles 
of the cloth as his share. 

So far, all has gone smoothly. Though the manufacturer 
has stood by and seen the fearful inroads made upon the web 
by the successive claimants, little has been said, and that in a 
low tone and in a business-like way. Some reason is known 
to the manufacturer why each of these persons should receive 
so much and no less. Some calculation which he is able rap- 
idly to make maintains a complete understanding between 
him and them. 

Now, however, the scene changes ; there remain but two 
parties as claimants to the six or seven hundred thousand 
yards that are left. On the one side we see a crowd composed 
of persons engaged in the mill as overseers, as clerks, as 
mechanics, as laborers, as " operatives," in all, some hundreds 
of men, women and children, of varying degrees of strength, 
skill and intelligence ; on the other side, stands the manufac- 
turer. All that these do not take, will be his ; and as piece 
after piece is rapidly cut off, he seems to fear that not enough 
will remain for him, while each of them appears disaffected 
that his own share is not larger, deeming it especially a hard- 
ship that, after he and his comrades are served, so much will be 
left to the manufacturer. According to their several dispo- 
sitions, some threaten that it shall not be so again ; some 
merely grumble ; others take up their little rolls of cloth and 
walk away with a patient air, as if they hoped for nothing 
better. 

At last the manufacturer is left with his share. If it has 
been a good season, and all has gone well ; if the cotton has 
turned out of good quality, if the weather has been propi- 
tious, with just enough of heat and of moisture for the quick- 
est and most uniform spinning ; if there have been no floods 
in the river, giving trouble, and no low water, so that the 
wheel has turned steadily and powerfully whenever the gate 
was lifted, the roll of cloth which the manufacturer will carry 



SERVICES VS. COMMODITIES. 1 89 

back into the warehouse will be large, and his face will wear 
a contented look. If, on the other hand, any one of a dozen 
untoward accidents, reasonably to be apprehended, has 
occurred, his share will be less, perhaps little, possibly nothing. 

246. The Problem of Distribution. — It is under the pres- 
ent title that we inquire why it is that each of these claimants 
on the product of the cotton factory takes so much and takes 
no more. Of course, in the immediate instance that reason is 
found in the force of contract. All the other parties had 
agreed with the manufacturer to allow him the use of their 
property, or to render him their services, at certain rates. 
But why did they contract at those rates, and not at higher ; 
and why will they, as they probably will, immediately proceed 
to make new contracts, at the same, perhaps at lower rates ? 

Why, in particular, is it that the division of the product is 
effected with so little of friction or complaint, as between the 
manufacturer and the water company, the owner of the 
ground, the owner of the mill, the owner of the machinery 
and of the working capital ; while between the manufacturer 
and the " hands " there is so much of dissatisfaction and 
jealousy, of complaint and irritation ? 

247. Distinction between the Exchange of Services and 
of Commodities. — Among those writers who have defined 
political economy as the Science of Exchanges, distribution is 
not recognized as a separate department of inquiry, involv- 
ing principles peculiar to itself. These writers find that the 
subjects of exchange are, broadly speaking, two, viz., services 
and commodities, or, labor and the products of past labor. To 
carry forward this distinction is not consistent with the sim- 
plicity of the science which these writers have in contempla- 
tion. The difficulty is soon resolved. They discover that 
commodities are, after all, nothing but services which have 
taken on a material form, and thereafter they speak only of 
services, and thereby secure to political economy " one grand 
characteristic of the great sciences, viz., simplicity." This 
effected, the distinction between the Distribution and the 
Exchange of wealth falls to the ground. There is no longer 
any need for the former term in political economy. 



19© POLITICAL ECONOMY. 

But I venture to assert that this forced simplicity, secured 
by compelling into a single form things having much that is 
not in common ; this false peace, which disregards irrecon- 
cilable differences ; this hasty generalization, by which services 
and commodities are made to be one and the same thing, has 
had the effect to render political economy signally barren 
through the very period when social philosophy has been 
most prolific, and, secondly, to forfeit nearly all popular 
respect for, and interest in, the so-called science of ex- 
changes. 

248. " During the present century," says the Duke of 
Argyle, in his Reign of Law, " two great discoveries have 
been made in the science of government : the one is the 
immense advantage of abolishing restrictions upon trade ; 
the other is the absolute necessity of imposing restrictions 
upon labor." 

I do not quote this passage, here, for the sake of raising 
the question of Ten-Hour laws or factory inspection (pars. 
471-3), but only to call attention to the clear, strong anti- 
thesis in which it places services and commodities. That 
statement does not exaggerate the general and still growing 
consent of social philosophers and legislators that the render- 
ing of services differs so widely from the exchange of 
commodities that the two must stand in different relations 
to legislation. More and more fully has this distinction 
come to be recognized. If political economy denies the 
validity of the distinction, so much the worse for political 
economy, in the eyes of social philosophers and statesmen 
alike. Surely, the simplicity of the science may be secured at 
too high a cost ! 

Equally against the pressure of enormous vested interests, 
and against the protests of professional political economists, 
the legislation of almost every enlightened country has pro- 
gressed by steady steps, through the last sixty, forty, and 
especially during the last twenty years, in the direction of dis- 
criminating vitally between commodities and services, allow- 
ing continually greater and greater freedom of contract in 
respect to the former, and bringing the contracts whick 



SERVICES VS. COMMODITIES. 191 

involve the latter more and more completely under the 
authority and supervision of the State. 

And yet there is complaint that statesmen and the mass of 
the people entertain such slight regard for political economy, 
whose professors, in the interest of the purity and simplicity 
of their science, discard from the premises of their reasoning 
(par. 21) all the " sympathies, apathies, and antipathies " of 
mankind, and insist upon treating a Manchester spinner, with 
a wife and six children, ignorant, fearful, and poor, as 
possessing the same mobility economically, and under the 
same subjection to the impulses of pecuniary interest, as a 
bale of Manchester cottons on the wharf, free to go to India 
or to Iceland, as the difference of a penny in the price may 
determine ! 

249. An Analogous Case. — But we shall not get a full meas- 
ure of the insufficiency of the reasons given for dropping the 
distinction between commodities and services, in exchange, 
unless we ask what would be the consequences to political 
economy of dealing in the same spirit with the analogous case 
of the distinction between labor and capital, in production. 
Suppose the political economist were to say : Capital is but 
the result of the labor of the past ; it is, in essence, labor 
which has taken on a material and more or less permanent 
form ; whatever is true of labor must be true of capital ; 
we will, therefore, resolve the two into one, and thus pro- 
mote the simplicity of political economy. Simplicity, indeed ! 
but at the cost of the loss of all significance, if not all sense. 
What sort of a political economy would that be which did 
not recognize the distinction between labor and capital in 
production? Yet the distinction has a singularly close 
analogy to that between services and commodities in ex- 
change. 

250. A Contest, though not a Destructive Contest. — It 
will be noted that the distribution of the product of industry 
involves what may be termed a perpetual contest between the 
parties to production. This contest is not a destructive one, 
since the interest of each of the participants requires the 
existence, and, by consequence, the sustentation, of all the 



192 POLITICAL ECONOMY. 

others. Yet, within the limits consistent with this, there is 
opposition of interests. 

251. The Parties to the Distribution of Wealth. — The 
contest is, in the last analysis, between individuals. We shall 
see that the real or supposed common interests of a number 
of producers may create a supposed class interest which will 
lead them to act in concert, with a subordination of individual 
preferences to the general good ; but, as a rule, the efforts of 
individuals are directed to a personal benefit. Inasmuch, 
however, as it would be impossible to work out the problem 
of distribution with reference to each man, woman, and child, 
we may aggregate individuals, according to what they have 
in common, into classes, larger or smaller, and may seek for 
the general law which governs the efforts of the members of 
each class towards the acquisition of wealth. 

252. Classes in Distribution. — Even if we disregard petty 
distinctions and inconsiderable exceptions, the prime classes 
appearing in distribution will vary in different countries. A 
classification which would fully meet the facts of industrial 
organization in India, would omit distinctions of prime import- 
ance in England. 

Inasmuch as we could not, in an elementary treatise, give 
the space needed to set forth the problem of distribution in 
each country or group of countries having a common indus- 
trial organization, we will consider for our present purpose the 
industrial organization of England. We take this, because i* 
is the most highly developed organization known to industry ; 
because it is largely reproduced in the United States and on 
the continent of Europe, and in Canada and Australia, and is 
everywhere, among progressive peoples, more and more 
widely extending from year to year. Moreover, it will be 
easier for the reader to work out for himself the problem of 
distribution in countries of a lower organization, than it would 
be to go from the simpler to the more complex forms of 
industrial life. 

Under the system which we have taken for the purposes 
of the present discussion, we have four classes of claimants 
upon the product of industry, and that product is accordingly 



CLASSES IN DISTRIBUTION. 193 

divided into four grand shares. These 'Classes and the 
shares respectively received by them may be expressed as 
follows : 

1. The landlord, receiving rent. 

2. The capitalist, receiving interest. 

3. The employer, or entrepreneur, receiving profits. 

4. The employed laborer, receiving wages. 

The reason for naming these several claimants in the order 
just given, will appear as we make progress in the discussion 
of the forces which effect the distribution of wealth. 



CHAPTER II. 

RENT. 

253. Definition of Rent.— Rent is the term applied to the 
remuneration received by the land-owning class for the use of 
the native and indestructible powers of the soil, or, as it might 
be expressed, for the use of natural agents. 

That remuneration may be paid in money or in produce. 
The term land, or natural agents, must be understood to in- 
clude not only arable land, but pasture, timber lands, min- 
eral deposits, water privileges and building sites. For the 
present discussion, however, it will be best to take our 
illustrations from the occupancy and cultivation of arable 
land. 

254. The Origin of Bent Illustrated. — Let us suppose a 
community, isolated from all others, to occupy a circular tract 
of land divided, as in the following diagram, into four sectors 
equal in extent but so differing in fertility that one piece will, 
with so many days' labor in the year given to plowing, 
cultivating and harvesting, yield 24 bushels of wheat per 
acre, while the second will yield, with the same amount of 
labor, but 22 bushels, the third but 20 bushels, and the fourth 
but 18. Now the assumption we have made as to differing 
degrees of fertility in the soil of the several tracts, is not an 
extravagant one. On the contrary, we might reasonably have 



194 POLITICAL ECONOMY. 

assumed the degrees of fertility to differ far more widely. 
" A quarter of wheat," says Mr. McCulloch, " may be raised 



in Kent, or Essex, or in the Carse of Gowrie, for a fourth or, 
fifth part, perhaps, of the expense necessary to raise it on the 
worst soils under cultivation in the least fertile parts of the 
kingdom." 

In order to further simplify the problem, we will suppose 
that all the inhabitants of this community reside in a village 
at the center. 

255. The Ante-Rent Stage of Cultivation.— Let the first 
case taken be when the village is yet so small that all the 
wheat required for the subsistence of the population can be 
raised upon a portion only of what we will call the 24-bushel 
tract. If the tract be held by a number of competing 
owners,* each acting for himself, seeking his individual in- 

* If the tract were held by one person, or by several persons acting in 
concert, a monopoly would be established, and a rent might be exacted. 
What would be the limit of that rent ? Two bushels an acre, inasmuch 
as one would do better for himself to take up for cultivation a portion 
of the 22-bushel tract, paying no rent, than give more than two bushels 
for the use of an acre of the more productive land. 

But this rent of two bushels per acre, would not be paid for the whole 
of the first tract, but only for the number of acres actually required for 
cultivation in order to furnish subsistence for the community. All the 
owners in the combination would have to divide among themselves the 
aggregate sum so obtained, none obtaining so much as two bushels an 



RENT EMERGES. 195 

terest, no rent will be paid, or only a rent so small that for 
purposes of economic reasoning we may disregard it. Each 
owner of land in this tract will be desirous of securing for 
himself whatever compensation, if any, is to be paid for the 
use of land. But as the entire tract is not required for cul- 
tivation, and, as, consequently, only a part of the owners 
can receive any compensation for their land, an active com- 
petition will set in, each man offering the use of his land for 
less and less, in order to get something, until rent falls to a 
minimum, or disappears altogether. 

256. Relation of Waste to Rent.— And it is here we see 
the significance of the word, "indestructible," in par. 253. All 
scientific reasoning about rent is based on the assumption that 
the tenant will leave the soil in as good condition as it was in 
when he took it. Now, it is possible for a tenant to impair 
the fertility of land, first, byintentional abuse, or, secondly, by 
taking away its productive essences, in the crops of successive 
years, without returning any thing to it in the shape of manures 
or other fertilizers. 

It is only upon the above assumption that it would be true 
that each owner of land in the twenty-four bushel tract would 
prefer to lease it for a very small rent, approaching nothing, 
rather than not lease it at all. Unless he could be protected, 
by law or contract, against exhaustion of the soil, he might 
prefer to let his land go unoccupied. But on the assumption 
stated, the proposition is true that, in the situation described, 
no portion of the twenty-four bushel tract would bring so 
large a rent that it might not, for purposes of economic 
reasoning, be treated as nil. 

257. Rent Emerges. — Let us now advance to the second 
stage. We will suppose that the population of the village 
has increased to such an extent that the whole of the twenty- 
four bushel tract will no longer raise, when cultivated as it 
has heretofore been, all the wheat required for the subsistence 

acre for his individual estate. Should any one owner try to overreach 
the others and secure the full rent for the whole of his own land, the- 
" ring " would be broken, competition would set in, and rents would fall: 
to the minimum. 



196 POLITICAL ECONOMY. 

of the community". Cultivation will then be driven down to 
an inferior grade of soils. A part of the second tract, the 
twenty-two bushel tract, will be taken up. 

Do you ask, why not increase the amount of labor upon the 
twenty-four bushel tract, and so raise more wheat to the acre ? 
I answer, because of the great fact of Diminishing Returns in. 
Agriculture, which was set forth in Part II. , with so much 
particularity. We shall now see the whole theory of rent 
built upon it. The fact itself is undeniable. In every coun- 
try of the world, and in every parish or township of every 
country, cultivation is seen descending to grades of soils be- 
low the best, because the yield from the highest grades can not 
be increased proportionally to an increase of labor expended 
thereon. 

Cultivation having, in the case of the community whose in- 
dustrial history we have traced so far, been driven down to 
the twenty-two bushel tract, rent will at once emerge. Not 
that rent will be paid for any portion of the latter tract, 
which will all be in the same condition, as regards compensa- 
tion for its use, as was the first tract, when that alone was 
cultivated ; but for the twenty-four bushel tract, and for each 
portion of it, rent will now be paid. Why ? Because any 
person desiring to raise wheat may better, may he not? pay 
something for cultivating a portion of that tract, than cultL 
vate a portion of the new lands for nothing. 

How much will he pay ? Exactly the difference between 
the crops to be grown on the two soils, with the same applica- 
tion of laboi*, i. e., two bushels, since he can afford to pay this 
rent rather than move to the less productive soil. As some 
must so move, the landlord will be able to exact the maximum 
rent from the present cultivator : if not, from some other. 

Let us now advance another stage, and suppose the increase 
of population to require the cultivation of the twenty-bushel 
tract. The effect of this downward movement of the limit of 
cultivation will be two-fold : 

First, the twenty-two bushel tract will begin to bear a rent, 
since any cultivator can better afford to pay a certain rent for 
the privilege than occupy a portion of the new land for 



THE LAW OF RENT. 197 

nothing. The amount of that rent will be determined by the 
difference in productiveness between the two tracts, being, in 
the case supposed, two bushels, an acre. 

Secondly, the tract first cultivated now brings its owner a 
rent (24 — 20=4), not of two bushels, but of four. It is no 
better land than it was before ; it produces no more wheat 
under the same application of labor and capital ; yet it yields 
its owner a rent twice as great as before cultivation descended 
to the third grade of soils. That increase of rent takes place 
simply and solely because cultivation has so descended. 

If, again, we suppose that the increasing needs of the 
community require the cultivation of the eighteen-bushel 
tract, even the twenty -bushel tract will begin to bear a rent, 
viz., two bushels, while the rent of the next tract will rise to 
four bushels, and that of the most productive land to six 
bushels, or three times the original amount. 

258. The Law of Rent. — If we have correctly traced the 
course of self-interest, in dealing with the occupation of land, 
under the necessity of a resort to inferior soils, we are pre- 
pared to state the law of rent. 

1. Rent arises out of differences existing in the productive- 
ness of different soils under cultivation at the same time, for 
supplying the same market. 

2. The amount of rent is determined by the degree of those 
differences. Specifically, the rent of any piece of land is 
determined by the difference between its annual yield and 
that of the least productive land actually cultivated for the 
supply of the same market, under equal applications of labor 
and capital, it being assumed that the quality of the land as a 
productive agent is, in neither case, impaired or improved by 
such cultivation. 

259. Cost of Transportation. — By productiveness through- 
out the foregoing discussion, has been intended net produc- 
tiveness, the cost of transportation to market being first 
deducted. 

In the illustration as thus far given, the cost of ti*ansporta- 
tion has been left out of account. Let us now, however, 
suppose a tract to be brought under cultivation for the pur- 



198 POLITICAL ECONOMY. 

pose of supplying this market, situated at so great a distance 
as to make the cost of transportation a considerable element 
in the problem of rent. 

If the reader will recur to the diagram, he will see that we 
have marked out a tract, at some distance from our village, 
the path thereto bearing the legend — 2, by which we have 
intended to signify that the cattle and men taking the grain 
to market will eat, going and returning, two bushels out of 
the produce of each acre. The net productiveness of the tract 
will then be, for the purpose of determining its rental, not 23 
bushels, but 21. It will not be cultivated until after the first 
two tracts have been completely occupied. It will then be 
cultivated, but will bear no rent so long as its produce, com- 
bined with that of those two tracts, sufiices for the sustenta- 
tion of the community. But when the increasing needs of 
population drive cultivation down to the 20-bushel tract, the 
tract in question will bear a rent of one bushel, which will 
rise to three when cultivation seeks the 18-bushel tract. 

260. A New Continent. — The reader will further note that 
we have connected the same community with the projecting 
edge of a continent, which we have named America, by a 
dotted line, to which we have attached the sign and figure — 8. 
These represent that portion of the crop of the year which is 
o-iven to railway companies and the owners of vessels, as a 
consideration for transporting the grain to the English market. 
The net produce of these lands is, then, 20 bushels. Though 
they actually yield 28 bushels to the acre, with the given 
application of labor, they will bear no rent till the 18-bushel 
tract of English land is brought under cultivation, when they 
will yield two bushels rent, an acre, the same as the 20-bushel 
English tract, the net productiveness being the same. 

But suppose this American land is of vast extent, and upon 
it can be raised all the grain which this, or any, market 
requires, what will be the effect upon rents ? Why this : no 
one will now cultivate the English 18-bushel tract. Why 
should one, since a greater net produce can be obtained by the 
same labor elsewhere ? This lowest grade of soils, therefore, 
falls out of cultivation. With what effect upon the rent of 



RENT AND TRANSPORTATION. 199 

other parcels of land ? To answer this, let us recur to our 
formula. The rent of any piece of land is determined by the 
difference between its annual yield and that of the least 
productive land under cultivation for the purpose of supplying 
the same market. The 24-bushel English tract has been 
bringing its owner 6 bushels, an acre, rent, because, and only 
because, the 18-bushel tract was necessarily brought under 
cultivation. Now, however, that American land, with a net 
productiveness of 20 bushels, an acre (28 — 8 = 20) is found in 
unlimited amount, the margin of cultivation is pushed back- 
wards, and the best of the English tracts brings but four 
bushels rent ; the next best but two ; the 20-bushel tract 
now bears no rent, as it is in competition with free American 
land of indefinite extent. 

Again, assume that the introduction of Bessemer steel rails 
and various improvements in ocean navigation reduce the cost 
of transportation of American grain to seven bushels out of 
every 28, what will be the effect on English rents ? Clearly 
the American land now has a net productiveness represented 
by 21 bushels, and, as it is of unlimited extent, all the English 
20-bushel land is thrown out of cultivation — for who would 
wish to cultivate it ? and the rent of the best English land is 
reduced to three bushels, and that of the second grade to one. 

The foregoing illustration accounts sufficiently for the great 
economic, and, by consequence, great social change, which has 
been going on in the British Islands within the last few years. 
The reduction in the cost of transportation from the American 
wheat fields beyond the Mississippi to the seaboard, and from 
the seaboard to Liverpool, has increased the net productiveness 
of those fields to a degree equal to the addition of several 
bushels an acre to the crop. This has thrown out of cultiva- 
tion much of the poorer English land, and, by lifting upward 
the limit of cultivation, has decreased the normal rent of all 
English lands, cutting deeply, in prospect, into the incomes of 
the land-owning class. The first effects, however, have been 
most severely felt by the cultivators of the soil, who, holding 
their farms by lease, find themselves still bound to pay the 
stipulated rents. 



200 POLITICAL ECONOMY. 

261. Belation of Bent to the Price of Land. — We have 
stated the economic doctrine of rent. The price of land and 
its rental value stand in a certain necessary relation to each 
other. Land has its price because, and only because, it can 
command a rent. But while the relation between the two is 
a necessary one, being no less direct than that of cause and 
effect, the ratio between the rent of land and the price of land, 
expressed in terms of produce or of money, varies widely. In 
some countries, where the amount of accumulated capital is 
large ; where a high degree of civil security exists ; where 
the rights of property are respected, and where the ownership 
of land carries with it social distinction and perhaps political 
influence, the price of land may be twenty, twenty -five or even 
thirty times the annual rental. In other countries, from the 
failure of one or all of the conditions indicated, land may not' 
sell for more than fifteen or even ten times its rental. 

262. Rent forms no part of the Price of Agricultural 
Produce. — From the law of rent, as it has been stated, we 
deduce the very important conclusion that rent forms no part 
of the price of agricultural produce. 

No proposition which the political economist has occasion 
to announce is so startling, at the first hearing, as this ; nor 
does any other contend against such persistent incredulity. 
And yet, no proposition can be more clearly established. We 
have seen (par. 132) that in the same market, at the same 
time, there is but one price for different equal portions of any 
commodity. We have also seen (par. 137) that normal price 
is fixed by the cost of producing that portion of the supply 
which is produced at the greatest disadvantage. 

Apply these principles to the case in hand. England does not 
raise all the wheat needed for the subsistence of her population. 
Besides cultivating the most fertile of her own fields, she 
makes heavy draughts upon the United States, France, Egypt, 
Hungary, and the Black Sea region. For the wheat of all 
these countries, however, so far as it is of the same quality, 
there is but one price. That price is fixed by the cost of raising 
the million, say, of bushels which are raised at the greatest 
disadvantage, which means, in this case, at the greatest dis- 



RENT AND THE PRICE OF BREAD. 201 

tance, viz., on the plains of Dakota. This wheat the English 
must have : the proof of which is found in the fact that they 
do have it. Now, if they will have it, they must pay the 
cost of raising it, that is, must pay enough to induce men to 
go to that far-off country, undergo the privations of a frontier 
life, undertake all the risks of pioneer agriculture, and submit 
to enormous charges for the transportation of their product by 
land two thousand miles to the seaboard, and, then, three thou- 
sand miles, by sea. If the English will not pay this price, they 
can not have the wheat. That they get the wheat is proof that 
they pay this price, which, in turn, sets the price for all the 
wheat raised in England, and for all the wheat brought 
thither, whether from France, from Egypt or from the Black 
Sea. Wheat may be raised in Middlesex at an actual 
cost not exceeding two shillings a bushel ; but the Middlesex 
farmer will not, on that account, sell his wheat below the mar- 
ket price, say six shillings, which price is fixed, as we have 
seen, by the wheat from America. The difference, four 
shillings, is to be profit for somebody ; and we will now pro- 
ceed to show that this body must be either the landlord, or 
the tenant, not the agricultural laborer, and not the consumer 
of flour. 

263. What Would. Happen if Rents Were Remitted?— 
We shall best make this appear by means of an illustration. 
Let us suppose that a philanthropic gentleman, whose rent roll 
is £20,000, being greatly moved by tales of distress, knowing 
that the quartern loaf is very dear, and believing this to be 
due to the large rents paid for the use of land, calls his 
tenants together, and tells them that, in consideration of the 
hard times and the great suffering of the poor, he has de- 
termined to remit one-half of the rent of all his farms. What 
would be the consequence ? Doubtless all the tenants would 
accept the proffered terms cheerfully, and humbly thank his 
honor. But would they sell the wheat at any lower price ? 
Not at all ; why should they ? They can get the market 
price for it. That price is not fixed by the cost of raising 
wheat on their farms, or any farms for which rent is paid. 
It is the no-rent land that raises that last portion of the 



202 POLITICAL ECONOMY. 

necessary supply of wheat which fixes the price of all 
wheat. 

But suppose, to imagine a most improbable case, that some 
one out of the fifty tenants on this estate were to go to the 
dealer in grain to whom he was accustomed to sell his crop, 
and say : " Mr. B., inasmuch as my landlord has remitted half 
my rent this year, I offer you my wheat a shilling less a 
bushel, in order that you may sell it at a corresponding re- 
duction to the baker." What would the grain-dealer do ? 
Clearly he would take the wheat, at the reduced price offered; 
but would he sell it to the baker for any less ? Or, if he did, 
would the baker, getting his flour a shilling " off," put down 
the price of the loaf ? Not if he were of the sort of baker that 
you and I know. 

But perhaps it is said, we concede that the farmers will not 
sell their wheat at any lower price, on account of the remis- 
sion of rent, but they will raise the wages of their laborers. 
Why should they ? They can make presents to their laborers, 
just as they could make presents to grain dealers or bakers, 
but we are talking now about business, and, as a matter of 
business, why should these fifty persons raise the wages of 
their laborers, in consequence of the generosity of their own 
landlord ? The laborers were willing to work, before, for the 
wages that were stipulated, the same wages, it may be 
assumed, which other laborers in the county were receiving. 
Why should the laborers now be unwilling to work at the 
same wages ? And if the laborers are willing to work at the 
same wages, why should the farmers pay more ? 

264. Resume of the Subject These illustrations may 

seem very elementary, but I have known so many persons, 
after a complete demonstration of the proposition we are con- 
sidering, go away, showing, by look or by remark, that they 
still clung to the notion that rent has, somehow, something to 
do with the price of agricultural produce, that I have thought 
it worth the space required to repeat the demonstration and 
fully illustrate the argument. I trust it has been shown, to 
the conviction of every reader, that rent is a matter 
between the landowner and the tenant, not between the land- 



THE THEORY, HOW FAR TRUE? 203 

lord and the agricultural laborer, or between the landlord and 
the consumer of agricultural produce. 

Rent is the surplus of the crop above the cost of cultivation 
on the least productive lands contributing to the supply of the 
market. Admitting the private ownership of land (pars. 
493-505), that surplus, necessarily, so far as economic forces are 
concerned, is left in the hands of the landlord. There, so far 
as economic forces are concerned, it must remain. The land- 
lord can give it away, if he pleases, just as he can give away 
his horse, or his house, or any thing that is his. He can give 
it to his tenant, just as he could give to any one else. But 
if he does, it becomes a pure gratuity to the tenant, who, 
under the operation of the principle of self-interest, will trans- 
mit it neither to the agricultural laborer nor to the consumer 
of food, but will retain it entire for his own enrichment. 

265. Attacks on the Doctrine of Rent. — Such is the 
economic doctrine of wealth, which is generally known by the 
name of David Ricardo, though, in truth, it was announced 
by Anderson, a Scotch economist, who wrote at an earlier 
date.* 

I postpone to Part VI. the consideration of attacks upon 
the doctrine of Rent, by certain American and French 
writers. 

266. The Doctrine of Hentj How Far Applicable to 
Actual Conditions? — The law of rent which has been 
expounded, is true only hypothetical^, that is, upon the condi- 
tion assumed, viz., that the owners and the occupiers of land, 
each for himself, fully understand their own pecuniary inter- 
ests, and will unflinchingly seek and unfailingly find their 
best market. 

How much does this mean ? A great deal ; more than ever 
was realized in any country, at any time, though it has been 

*It is not, however, wholly inappropriate to join the name of Ricardo 
to this doctrine, on account of the great force and clearness with which 
he expounded and defended it. Anderson's statement of the same prin- 
ciple, though perfectly correct, was so made as to attract no attention, and 
it was not till long after Ricardo made the doctrine famous, that it 
became popularly known that the substance of it was contained in 
Anderson's work. 



204 POLITICAL ECONOMY. 

far more nearly approached in some than in others. Just 
what is implied in the above assumption ? 

On the landlord's part that (1) he would as soon take a new 
tenant as retain one whose family had been on the soil for 
centuries ; that (2) he will entertain no other consideration 
than the realization of the largest possible rent ; that (3) he 
knows all the facts which in any way bear upon the highest 
rate that could be charged for the use of the land without 
driving away all would-be tenants. 

On the tenant's part, that (l) he has the means to place 
himself elsewhere ; that (2) he could carry with him the value 
of his stock and fixtures, and of any improvements made dur- 
ing his tenancy ; that (3) he knows and can intelligently can- 
vass the varying advantages of a sufficient number of locali- 
ties to make his choice practically indefinite ; and that (4) 
neither indolence, nor inertia, nor dread of change, nor love 
of home, friends or country, will intervene to keep him from 
his best market : that is, where he can rent land, of a given 
degree of productiveness, at the lowest annual rate. 

The recital of the foregoing conditions shows that Ricardo's 
law does not furnish a formula by which the rent of a 
single piece of land can be determined in advance. The 
doctrine is true only hypothetically, and the conditions 
assumed exist nowhere. 

267. Yet this hypothetical doctrine of rent is by no means 
to be regarded as vain and illusory. It is, on the contrary, of 
vast importance. It must be fundamental in any correct 
theory of the distribution of wealth. No projectile ever 
describes a perfect parabola, since the resistance of the air 
and the force of the wind will interfere to prevent an abso- 
lute compliance with the law of the projectile. Yet the artil- 
lerist must always have reference to that law in pointing his 
piece, making such allowance for disturbing influences as 
existing conditions may seem to require. Any attempt to 
explain the partition of the product of industry which should 
leave Economic Rent out of account, would be either futile 
or deceptive. 

In Bome countries, notably in the United States and in 



AMERICAN RENTS. 205 

England, Ricardo's law furnishes the great underlying prin- 
ciple according to which, with more or less of divergence 
from general or from local and individual causes, actual 
rents are primarily determined. In other countries, like those 
of continental Europe generally, where custom operates 
powerfully upon the rental of land, the doctrine is still of 
importance ; first, as clearly furnishing the outside limit of 
rent ; secondly, as establishing the proposition that the 
question of rent or no rent, of high rent or low rent, is purely 
a question between landlord and tenant, not between the 
employer and the employed, and not between the producer 
and the consumer of food. 

268. Rents in the United States. — We have said that in 
some countries the economic doctrine of rent furnishes the 
principle which primarily determines actual rents. The 
United States offer the most striking illustration of this. So 
completely is the American mind imbued with the feeling 
that a thing is worth what it will bring ; so little sympathy is 
here found for the notion of classes which, by reason of weak- 
ness, must be hedged in from competition with outside 
forces ; so vast are the tracts of arable land not yet occu- 
pied ; so freely do our people move from place to place ; so 
slight are their attachments to locality, that no prejudice what- 
ever would be created by a landlord's demanding the utmost 
rent which the tenant could, and in the result, would, pay. 
The fact that the tenant actually paid the rent demanded 
would be proof sufficient that he ought to pay it ; that the 
land was worth it, and that the landlord showed only a 
proper sense of his own interest in advancing the price. 

Nay, should the tenant refuse to pay the increased rent and 
give way to another, I know not an American community 
where odium would attach to the landlord. It would be felt, 
it would be freely said : If the tenant is not willing to pay 
the price of the land, let some one take it who is. And what 
is true of the United States in this particular, is true probably 
in nearly equal degree of Canada and Australia, new coun- 
tries exhibiting the same general conditions of social life. 

Here we see the unrestrained operation of the principle of 



2o6 POLITICAL ECONOMY. 

competition, with a wholly beneficial result. The tenant and? 
landlord, being substantially on an equality as to intelligence, 
enterprise and freedom of movement, seek each his own inter- 
est, yet without injury to the other. 

269. English Rents. — When,- however, we reach England, 
we find a new force entering actively to influence rents, all 
on the side of the tenant. Here the sentiment is universal 
that there are classes which, by reason of wealth, education, 
and social position, are bound to do and to forbear much, out 
of regard to the interests of classes deemed to be permanently 
and hopelessly weak. 

The gentleman must never forget, in dealing with his ser- 
vants, his laborers, his tenants, and even in some degree his 
trades' people, that he is dealing with inferiors and depend- 
ents, who are, in a sense, under his protection, who can not, 
easily defend themselves against encroachment or fully assert 
their own interests, and that, in consequence, he is bound to 
act somewhat differently, it may be very differently, from what 
he would were he dealing with his equals. 

But it is in regard to land that this sentiment operates with 
the greatest force. It would be impossible for an English 
landed proprietor to feel that freedom in regard to raising 
rents which characterizes the action of an American land- 
owner. A gentleman there who should undertake to force up 
rents, acting on the principle that, if his present tenants could 
not or would not pay his price, he would find others to do it, 
would feel the lash of public indignation descend on his back 
till life was made a burden to him. Instead of gaining 
increase of style and state through an enlargement of his 
rent-roll thus obtained, his social standing would be destroyed. 

With public sentiment thus acting strongly and steadily in 
restraint of the natural impulses of the landholding class, we 
should look to see a divergence of actual from theoretical 
rents, all on the side of the tenant's interest ; and such, indeed, 
we find to have been the case down to the time when, per- 
haps ten years ago, American competition began to operate 
with prodigious and altogether unprecedented force. "The 
rent of agricultural land," wrote Prof. Thorold Rogers, " is 



RENTS IN IRELAND. 207 

seldom the maximum annual value of the occupancy ; in many 
cases is considerably below such an amount." 

270. Customary Rents on the Continent of Europe. — On 
the Continent of Europe, rents are, in general, not determined 
by competition, but by custom, to which Mr. Mill has assigned 
the same beneficent function in economics it has always per- 
formed in the sphere of politics, as " the most powerful pro- 
tector of the weak against the strong." In Switzerland, 
France and Italy, rents were formerly fixed almost universally 
by the custom of the country, at a certain definite portion of 
the produce of the land. This species of tenure, known as the 
Metayer tenancy, has been fully recognized as giving to the 
peasantry the use of land at less than the maximum rents, as 
determined by the application of the purely economic for- 
mula. So strong is custom in protecting the tenant's inter- 
est, in these countries, that oftentimes it happens that, where 
cities have sprung up during the continuance of a family upon 
the soil, giving a local market for produce, and, by conse- 
quence, raising prices, the landlord, even in admitting a new 
family to the estate, does not attempt to exact a larger share 
of the produce. 

"A proprietor," says Sismondi, writing of Tuscany, 
" would not dare to impose conditions unusual in the country ; 
and, even in changing one metayer for another, he alters 
nothing of the terms of the engagement." 

271. Rents in Ireland.— We have seen how far actual 
may be made to diverge from theoretical rents, all on the 
side of the tenant's interest, by the force of public sentiment. 
Let us now turn to a country where, in the time of which we 
are to speak, the population was not homogeneous ; where 
prejudices of race and religion had engendered animosities 
that descended from generation to generation ; where no 
friendly public opinion stood guard over the interests of a 
peasantry whose improvidence concurred with the greed of 
the landlord class in exciting a fierce and unremitting competi- 
tion for the occupancy of the soil. 

The story of the wrongs done to Ireland is so familiar that 
it is needless to enter into details to show why it was that in 



208 POLITICAL ECONOMY. 

Ireland nothing intervened between landlord and tenant to 
break the force of competition. It was not merely that the 
two classes were of different races, of different religions, and 
in some degree also of different speech. The confiscations 
and colonizations of Elizabeth, the wars of Cromwell, and 
lastly the Penal Code, of which the temperate Hallam says, 
" to have exterminated the Catholics by the sword, or expelled 
them, like the Moriscoes of Spain, would have been little 
more repugnant to justice and humanity, but incomparably 
more politic " — these were the prime causes which had engen- 
dered antagonisms and animosities such as have rarely, in 
modern times, divided the population of any land. 

272. In addition hereto another and most potent cause 
contributed to the severity with which rents were exacted. 
This was absenteeism, a great part of the soil being owned by 
landlords who resided in England and transacted their 
business through local agents, or through " middlemen," who 
assumed the estimated rental of large estates and wrung from 
the peasantry whatever they could. 

By a kind of natural selection, out of these agents and mid- 
dlemen came to be developed a distinct species of social animal, 
peculiarly fierce and cunning, of preternatural acuteness to 
search out every possible occasion for fresh exactions, with 
heart of flint and face of brass. Only men with a natural 
aptitude for exaction, distraint and eviction were selected for 
such a work ; years of practice made them perfect in the arts 
of extortion, while the consciousness of being despised and 
hated to the point of frenzy choked every casual thought of 
pity, and made absolute heartlessness both a professional 
virtue and a condition of self-preservation. 

Such was the situation in Ireland, on the part of the land- 
lord class, furnishing all the conditions necessary to a rigid and 
relentless enforcement of rent, up to the economic maximum 
- — i. e., to the extent of giving to the owner of the land the 
entire surplus produce above the cost of cultivation on the 
poorest soils. 

273. How was it on the side of the peasantry? Were they 
prepared to supply the conditions which should prevent 



RENTS IN IRELAND. 209 

competition from becoming disastrous, destructive ? Un- 
fortunately, the peasantry of no country in Europe were 
less fitted to enter upon such a struggle with the landlord 
class. Sanguine, improvident even to recklessness, the Irish 
people clung the more closely to the land the more miserable 
their lot ; multiplied at a rate inconsistent with the capacity 
of the soil for providing subsistence, and competed among 
themselves for the occupancy of smaller and continually 
smaller parcels with a passionate eagerness. Had it been a 
stationary population, like that of France, which entered on 
this struggle for the fruits of the soil, the peasantry might 
have had some chance ; but, with a population at least fifty 
per cent, beyond the capabilities of the soil to support, as the 
art of agriculture was then practiced, while every year largely 
increased the number of eager, penniless competitors, misery 
could hardly fail to result. 

In the situation described, it was a matter of course that 
rents were advanced to the full limit allowed by the law we 
have stated. But there was more than this and worse than 
this. Rents were demanded by the agent, or middleman, 
rents were even offered by the peasantry in the eagerness of 
their competition, in excess of the economic maximum ; in ex- 
cess of what could possibly be paid ; in many cases in excess, 
incredible as it may seem, of the whole annual produce of 
the soil.* 

274. But, it may be asked, if the tenants could not pay the 
rents, what harm to promise them? The landlords clearly 
would be disappointed ; but how would the tenants suffer ? 

The injury done to the peasantry through this cause was 
threefold. 

First. The whole possible produce above the bare necessi- 
ties of subsistence, belonging to the landlord, the tenant had 
little interest in the crop or in keeping up the productiveness 

* Cottier rents are nominal in pecuniary amount, because these rents 
are fixed so high that it is impossible for the cottiers ever to pay them. 
The nominal amount of the rent far exceeds the whole produce which 
the land would yield. — H. Fawcett, " Pol. Economy." This statement is 
probably somewhat too sweeping. 



210 POLITICAL ECONOMY. 

of the land. Having nothing to hope for, and being in so 
bad a plight that there was nothing but eviction to fear, all 
inspiration died out of the cultivation of the soil. What was 
done was always the least and the meanest that could be 
done. 

Secondly. The promise of excessive, and indeed impossible, 
rents kept the tenant always in debt to his landlord. Hope- 
less debt differs little from slavery. The Irish cottier lived 
by the breath of the agent or the middleman. 

Thirdly. The joint effect of the causes described was con- 
tinually to lower the standard of living, and consequently the 
cost of cultivating the no-rent land, or lowest grade of soils, 
by making the peasantry reckless regarding the increase of 
their numbers. 

275. Effects of Unequal Competition. — In the foregoing 
description of the state of the Irish tenantry prior to 1844, we 
have an illustration of the results of an unequal competition. 
That same force which in the United States, operating upon 
an intelligent, alert, active, aggressive population, under equal 
laws, produces effects only beneficial, in Ireland, under the 
conditions recited, produced disaster. 

276. Actual vs. Theoretical Rents. — We see, then, that 
practically there may be three classes of cases in respect to 
rent. 

First. Where, under active competition, with both parties 
substantially on an equality in respect to intelligence, alert- 
ness and freedom of movement, with no laws or habits or 
sentiments opposing the exaction of all which any thing that 
is the subject of bargain and sale may be worth, rents, 
as in the United States, conform nearly to the Ricardian 
formula. 

Second. Where, among a population presenting wide dif- 
ferences of wealth and intelligence, and perhaps, also, of rank 
and political power, sentiments of personal kindliness and 
mutual regard between landlord and tenant, and a strong 
authoritative opinion throughout the community respecting 
the obligations imposed by the ownership of property, espe- 
cially of landed property, serve, as in England, and in many 



RENT OF PASTURES. 211 

countries of the continent of Europe, to reduce the pressure 
of the landowning upon the tenant class ; making the land- 
lord slow to seek occasions for raising rent ; reluctant in forc- 
ing matters with the tenant to extremity, and altogether 
unwilling to proceed, in the case of a decent, well-meaning 
tenant, to distraint and eviction. Hence it comes about that 
rents vary widely from the Ricardian formula, always on the 
side of the tenantry. 

Third. Where, with a tenantry ignorant, improvident, per- 
haps reckless in respect to family increase, and by consequence 
unable to offer effective resistance to an acquisitive, aggres- 
sive treatment of the question of rents, little in the way of 
sentiments of personal kindness on the part of landlords, and 
nothing in the way of an authoritative public opinion, enters 
to restrain the impulses which tend to advance rents. Here 
we have a result of ultimate injury to the economic interests 
of both parties and of the entire community. 

277. The Bent of Pastures. — We have thus far spoken 
only of the rent of arable land. We have taken this first, 
not only because it is most important, so far as the mere 
amount involved is concerned, but also because the principles 
governing rent can be here most easily discerned. If we 
have done our work well, there will be little difficulty in 
applying the principles discovered to the rent of pastures, 
water privileges, building lots, mines and wood lots. 

We have, throughout the foregoing extended illustration, 
assumed the existence of a considerable body of no-rent, 
arable lands, furnishing the base-line from which the rentals 
of the superior lands are respectively measured. To a certain 
extent this assumption corresponds to the facts of agriculture. 
More commonly, however, those lands whose net productive- 
ness is so low that they could only be cultivated on the con- 
dition of paying no rent, are turned into pasture or grazing 
land. We might, therefore, say that, in many agricultural 
regions, the base-line for ascertaining rents, is furnished by a 
certain grade of pasture-lands, large tracts of which would 
yield but a scanty subsistence to a few cattle or sheep. Then 
come the more valuable pastures, which pay an appreciable 



212 POLITICAL ECONOMY. 

rent, and, parallel with these, arable lands of moderate fei- 
tility, paying, also, an appreciable rent. 

As we go upward in the scale of fertility, lands may be 
transferred from grazing to tillage, or from tillage to graz- 
ing, according to the demand for animal as compared with the 
demand for vegetable productions, at the time prevailing in 
the local market, or according to other conditions which we 
need not enter into here. Arable land is, also, often turned 
into pasture for the purpose of allowing it to recuperate in 
respect to certain properties of the soil which have been 
unduly drawn upon by the crops of previous years. 

While, thus, a large part of the lands of any agricultural 
district may be used interchangeably for tillage and for graz- 
ing, it seldom happens that the best lands are used at all, or, 
at any rate, for more than the briefest period, as pasture. 
Generally speaking, the poorest lands are always used as 
pasture, the richest lands are always cultivated excepting, 
only, during intervals required for recuperation. It is in 
respect to the intermediate grades of soil that the alternation 
referred to takes j)lace. The principle which determines the 
rent of pasture lands is the same as that with which we have 
already become familiar through our discussion of rent in its 
application to arable lands. 

278. The Rent of Water Privileges. — Water privileges 
have three uses : first, for power, in connection with saw-mills, 
grist-mills, cotton-factories, etc.; secondly, for the supply of 
water, for drinking, washing, and other domestic purposes, to 
cities and towns ; thirdly, for the irrigation of land, for the 
purposes of agriculture. The volume of water, the conven- 
ience of its application to the purpose for which water is, in 
the specific instance, required ; proximity to the market, that 
is, the place where the water is to be used, these are the 
principal considerations which determine the productiveness 
of water-privileges for the purposes of rent. For the supply 
of cities and towns, the quality of the water also becomes an 
element of importance. 

Productiveness being thus estimated, there are all degrees 
of productiveness among water privileges. There are the 



RENT OF BUILDING LOTS. 213 

no-rent privileges, which, by reason of distance, or inconven- 
ience of application, or of insufficient or iiTegular flow, are not 
used at all, or only used on condition that no compensation is 
exacted therefor. Above these, are found low-rent privileges 
and high-rent privileges, the measure of rent being the degree 
of productiveness. 

279. An instructive illustration of the relation of monopoly 
to value is often afforded by the action of water-power com- 
panies, in regulating the prices they charge for power, according 
to the price of coal. In, for example, a given textile manufac- 
turing city of New England, if coal can be delivered at four dol- 
lars a ton, the water-power company sells to a cotton or 
woolen-mill the right to take water sufficient to create (by its 
fall through a given number of feet), one-horse power, for, say, 
$24 a year, that amount representing the estimated cost of 
maintaining one-horse power, throughout a year, by the 
consumption of coal, at four dollars a ton. Should the price 
of coal fall to, say, three dollars, the water-power company 
would readjust its charge to meet the changed conditions of 
competition with steam. 

Within the limits thus determined, the price of water-power 
is a monopoly price, being entirely irrespective of what it cost 
the company to acquire its rights and construct its works, and 
of what it may cost to keep up its service. To that monopoly, 
however, a limit is set by possible competition with steam- 
power. 

280. The Rent of Building Lots. — The rent of building 
lots is determined by the principles already set forth. There 
are no-rent building lots in abundance. Every township 
has its squatters whose cabins, placed out of the way, on 
worthless land, pay no rent. Even in the neighborhood of 
large cities, shanties are perched on the rocks without objection 
from owners of land which, in another twenty or fifty years, 
may bear a high rent. 

But something more is wanted in the case of a building, 
than ground to stand upon. The building must be placed 
with reference to its uses ; and it is the productiveness of the 
lot in that respect which determines the rent. Among build- 



214 POLITICAL ECONOMY. 

ing lots that bear a rent, the minimum may be said to be 
determined by the value of land for the purposes of agricul- 
ture. A man leases a hundred acres of arable land, of uniform 
quality, for $500, a year, and places his house upon some conven- 
ient spot, occupying, with barns and sheds, half an acre of 
ground. The rent of this building lot is $2.50 a year. If he 
were a market gardener near a large city, the rent of the lot so 
occupied might be $25. If, on the other hand, he were a 
market man instead of a market gardener, he might pay $50 
for the rent of the ground on which to build his cottage in the 
suburbs of the city, and five times that sum as the ground rent 
of his little shop in the heart of the city. If a banker, he could 
better afford to pay $2,000 or perhaps $5,000 ground rent on 
State Street, or Wall Street, or Lombard Street, than occupy 
premises half a mile away were he permitted to do so for 
nothing. 

The productiveness of land occupied for the purposes of 
manufacture or trade, has reference to the number of persons 
passing through the street, or to the proximity of water- 
privileges, or wharf -privileges, or railroad stations, or to vari- 
ous other facilities for either doing a greater amount of busi- 
ness with the same capital, or for saving expenditure upon a 
given amount of business. Such lots being limited in number, 
yet held by competing owners, their rent conforms closely to 
the Ricardian formula. In regard to this kind of rent, com- 
petition is, if not perfect, at least very active on both sides. 
No favor is shown or asked ; the two parties to the bargain 
are regarded as equal. The landlord gets all the land will 
bring, if not from one tenant, then from another. The ten- 
ant expects to pay all that any man will be willing to give for 
the commercial advantages of occupying the ground. 

281. The Rent of Mines. — The rent of mines is not gov- 
erned wholly by the economic law of rent which, as stated 
(par. 253), has reference to the native and indestructible powers 
of the soil. Under proper care and husbandry, cultivation 
does not exhaust the soil. "With rotation of crops, with 
annual manuring and an occasional season of rest, such as are 
provided for in most English leases, the land returns to its 



RENT OF MINES. 215 

owner, or his representative, after 30, or 50, or 99 years, with 
unimpaired virtue. The enjoyment of water privileges does 
not exhaust the capacity of the river. The occupation of the 
ground for a generation does not contract the surface 
available for the same or a different use by another 
generation. 

By the very nature of such deposits, the enjoyment of min- 
ing privileges diminishes the sum of the mineral in existence. 
The mine may be " worked out " in ten years or in twenty or 
in fifty, and nothing but an ugly pit be returned to the owner, 
at the expiry of the lease. The rent of such properties is not, 
therefore, regulated by the Ricardian formula, without modi- 
fication. The rent must be increased sufficiently to compen- 
sate for the ultimate exhaustion of the deposits : the destruc- 
tion of the value of the estate. Otherwise, the rule of rent 
for these properties is the same as in the case of other natural 
agents. The chief elements, here, in determining productive- 
ness for the purposes of rent, are the quality of the product, 
the extent of the deposits, the depth of working, the distance 
from a market. 

There are, in the United States, vast deposits of coal, for 
instance, near the surface, not far from a market, which will 
not pay for working, even if no rent be exacted, because the 
quality is poor, though the coal will burn, will give out light 
and heat, and, if delivered at the furnace free of cost, would 
be worth using. 

There are other deposits of coal, of excellent quality, 
which will not pay for working by reason of the thinness of 
seams, or their narrow extent laterally. There are, again, 
vast deposits of good coal, which, by reason of their depth 
below the surface, are not sought by productive industry and 
perhaps never will be. There are still others which, by rea- 
son of distance from market are not now worth taking up 
at the government rates, which may in another century supply 
great manufacturing cities with power. These and other 
mines, a little more fortunate in character or location, which 
will just pay for working, furnish the no-rent mines. Above 
these are mines which pay rent, the degree of productiveness 



216 POLITICAL ECONOMY. 

rising until the rental of a single mine becomes the income of 
a prince. 

282. The Rent of "Woodlots. — Woodlots and timber lands 
are, in fact, seldom rented in the United States and other 
new countries ; first, on account of the difficulty which would 
be experienced in preventing waste and abuse by a tenant ; 
and, secondly, because it is generally more profitable to cut 
off the whole body of wood or timber at once, than to pick 
from it, year by year, a certain proportion of what is stand- 
ing. For these reasons, woodlots, when they reach the right 
condition for cutting, are commonly sold to large operators, 
at prices determined by the " net productiveness " of the 
individual tracts, reference being had to the amount and 
quality of timber and other wood, to the distance from market, 
facilities for transportation, etc. 

The price at which an individual woodlot may sell, once in 
thirty or fifty years, may properly be conceived of as related 
to an annual rental, not collected at the time, but allowed to 
accumulate against the day of sale. 

In old countries, where the value of wood and timber bears 
a much higher proportion to the wages of labor, than in new 
countries, and where the tracts so occupied are generally 
surrounded by dense populations, woodlots and forests are 
more commonly culled from year to year, instead of being cut 
off all at once. In such a condition, the Ricardian formula 
of rent would strictly apply to the several tracts supplying 
any given market, although, as a matter of fact, an owner 
would be likely to conduct the cutting of the wood and tim- 
ber himself, or through his paid agents, on account of the 
difficulty, above referred to, of preventing waste and abuse on 
the part of a tenant. 

283. The Rent of Buildings and of Permanent Improve- 
ments on the Land.— The so-called rent of buildings, exclusive 
of ground rent, is not governed at all by the economic law 
of rent, but by the principles which regulate the Interest on 
Capital, of which we are next to speak. A man owns a build- 
ing lot, for which he could obtain a ground rent, that is, rent 
proper. Being also a capitalist, he erects a building thereon. 



THE UNEARNED INCREMENT. 217 

Why does he so ? Because he believes that, in addition to the 
rent of the ground, he can also obtain, for the occupation of 
the house erected thereon, a fair remuneration for the use of 
his capital, a remuneration equal (damage, trouble and risk 
of loss being taken into account) to what he would receive 
were he to put his capital into the form of live stock or rail- 
road shares, or government bonds. The building is an invest- 
ment of capital. If his investment has been shrewdly made, 
he will receive from his tenants a sum which, in the view of 
the economist, consists of two parts, rent proper — ground 
rent— and interest. We shall see, in the next chapter, that 
these two elements of that remuneration are governed by 
widely different laws. 

284. The Unearned Increment of Land.— We have seen 
how rent arises, under the private ownership of land, and 
what principles govern its amount and economic direction. 
We have seen that rent is purely a question between landlord 
and tenant, not between employer and employed, not between 
the producer and the consumer of agricultural produce. We 
have seen that, conceding the private ownership of land, rent 
must, so far as economic forces are concerned, remain in the 
hands of the owner of land ; that it can only get into the 
hands of the tenant as a gift ; that if it reaches the hands of 
the tenant, no economic forces will carry it into the hands of 
the agricultural laborer or of the consumer of food. It can 
only get there by a further gift or series of gifts. 

We have also seen that, whenever the limit of cultivation is 
lowered, that is, whenever a less productive grade of soils is, 
by the increasing demands of population for subsistence, 
brought under cultivation, the rents of all previously culti- 
vated lands are correspondingly raised, to the enrichment of 
their owners, not by reason of any increase in the yield of 
such lands, or by reason of any greater exertions put forth by 
the owners, but solely by reason of the necessity of cultiva- 
ting a lower grade of soils. 

Upon this view of rent, has arisen the question, Why should 
the private ownership of land be permitted to exist ? at any 
rate, why should this incident of private ownership, the 



218 POLITICAL ECONOMY. 

aggrandizement of the owner through the growth of the com- 
munity, be longer permitted to exist ? Why should not this 
" unearned increment of land," to use Mr. Mill's phrase, go to 
the community, and not to any individual ? 

This demand has been made very vigorously, of late years, 
by a school of writers which embraces more than one econo- 
mist of reputation. As the elements of the question are not 
purely economic, but embrace considerations of political 
equity and political expediency, I shall reserve all remark 
concerning it till we reach Part VI. 



CHAPTER III. 



INTEREST. 



285. Definition of Interest. — We have seen one share cut 
off from the product of industry — rent ; one claimant satisfied 
— the landlord. The reader now sees why this topic was first 
treated. In economic theory, this is ever the first claim to be 
adjusted and paid. We can make no progress — not so much 
as by a single step — toward discovering the principles which 
govern the division of the product of industry among capi- 
talists, employers, and laborers, until rent is taken out, until 
the claim of the landlord is satisfied. Hence the topic, Rent, 
comes first, in a treatise on the distribution of wealth. 

We are now to speak of Interest : the share of the Capitalist 
in the product of industry. 

In Part II. we inquired into the origin and office of capital. 
We saw that capital consists of savings out of earnings, the 
native powers of the earth, air and water not being regarded 
as capital. Wealth having been produced, some of it, much 
of it, must soon be consumed, in order to sustain the produc- 
ing classes, and to repair the waste inevitably attendant upon 
production, and even upon the mere lapse of time. All of it 



THE THEORY OF INTEREST. 219 

may be so consumed, and will be, under the urgent and con- 
stantly recurring desires which wealth alone can satisfy, unless 
some motive for saving can be found which shall prove strong 
enough to withstand the impulses to immediate gratification, 
and to wrest a portion of wealth from the jaws of appetite. 
We have shown what that motive is, and how it manifests 
itself in a barbarous condition. 

In an advanced state of society, the motive to saving is not 
so much found in the desire of the individual to accumulate 
tools and materials for his own handling, as in the desire to 
obtain interest from some one else, for the use of that portion 
of wealth whose consumption is thus postponed. To the 
varying strength of this motive with different men, and 
different races, we shall have occasion to refer further on. 

286. Interest not Paid for the Use of Money.— It has been 
said that interest is the compensation paid for the use of cap- 
ital. The usual form of statement is that interest is paid 
for the use of money. Broadly speaking, this is not true. 
Money, which is one of the many forms of capital, is, indeed, 
often the agent in effecting the loan of other species of capi- 
tal. But in these cases, it is not the money, philosophically 
considered, that is borrowed : The interest paid is for the 
use of the capital obtained through that agency. One bor- 
rows $5,000, and gives a note for that sum, with interest. 
With this money he purchases live stock, machinery for his 
factory, or goods for his trade : these were what he wanted ; 
these were what he really borrowed ; these are what be 
pays interest upon. The money was solely a means to that 
end. 

But money is not always, it is not in a majority of cases, 
in a highly advanced state of industrial society it is, indeed, 
rarely, the agent in effecting the loan of capital. The coun- 
try merchant buys goods and gives his notes for two, four, 
and six months, promising to pay the price with interest. 
Interest on what ? On money ? No money passed in the 
transaction. What was borrowed was hardware and crockery, 
dry goods, and groceries. The young farmer buys cattle to 
stock his farm, and gives his note, promising to pay, with 



220 POLITICAL ECONOMY. 

interest : not interest on money, for he has had none, but 
interest on the value of cows and working oxen. 

287. The Rate of Interest. — Let us now inquire how the 
rate of interest is determined. 

Since the use of capital is a matter of bargain and sale, or of 
exchange, what should determine the rate of interest but the 
demand for, and the supply of, loanable capital ? 

Here we see the futility of the notion, which, from time to 
time, obtains a strong hold on the public mind of America, 
and, indeed, of all new countries, that the rate of interest is 
to be lowered by increasing the supply of money through the 
issue of paper notes. Men wish to borrow that they may get 
control of the agencies of production : capital in its various 
forms. The amount to be paid for the use of capital will 
depend on its abundance compared with the occasions for its 
productive use. The issue of money will not increase the 
number of horses and cattle and plows, nor will it build shops 
and warehouses or construct machinery for manufacture or 
for transport. 

If the people of a community be thriving and progressive, 
the demand for capital, to start new enterprises, or to enlarge 
those already established, will be very great. If the commu- 
nity be, also, young, having brought to new fields the social 
and industrial ideas, tastes and ambitions of an old society, 
the supply of capital will be scanty, and the rate of interest 
will rule high. 

288. Is this high rate of interest a hardship ? No, the hard- 
ship lies in the scarcity of capital. The high rate of interest 
becomes the active means of removing that hardship, through 
increasing the supply of capital available to meet the demand. 
A high rate of interest is not an evil, but the cure of an evil. 
How is this ? 

Capital is, as we have seen, the result of saving. Interest, 
then, is the reward of abstinence. A part, a large part, of 
all produced wealth must be at once consumed to meet the 
conditions of human existence ; but the remaining portion 
may be consumed or may be accumulated, according to the 
will of the owner. The strength of the motive to accumu- 



HIGH RATES OF INTEREST. 22 1 

lation will vary with the reward of abstinence. If that be 
high, the disposition to save will be strengthened, and capital 
will be rapidly accumulated ; if that be low, that disposition 
will be relatively weak, and capital will increase slowly, if, 
indeed, the body of existing capital be not dissipated at the 
demands of appetite. 

We do not say that the strength of the disposition will 
increase proportionally to the increase of remuneration ; that 
it will, for instance, be one-fifth greater at six per cent, inter- 
est than at five per cent. Moral philosophy has reached no 
such precision in gauging motives. But it is certain that, 
among the same people, and at the same time, the higher the 
rate of interest the stronger will be the motives which lead to 
saving : the more rapid the accumulation of capital.* 

So we see that a high rate of interest, instead of being the 
cause of an evil, is really its cure ; and that to depress the 
rate of interest, as, for example, by force of law, would be to 
retard the processes by which capital is supplied. 

As a high rate of interest is not in itself an evil, so a low 
rate of interest does not necessarily imply a condition which 
is a subject of congratulation. A low rate of interest may 
mean that, in a thriving, progressive community, the accumu- 
lation of capital has gone on so rapidly as to outrun the occa- 
sions for its productive use. It may mean that the people are so 
dull, indolent and unambitious, or the state of society so 
disordered, that commercial and manufacturing enterprises 
are not undertaken, and no enlargement of traditional indus- 
tries is looked for. A small amount of capital more than 
suffices for such scanty needs. 

* In general, taking all classes of producers into account, this will be so. 
Yet the effect of a reduction of the rate of interest is not wholly upon 
one side. Prof. Marshall very justly exhibits an effect of a reduction of 
the rate of interest, which, with a certain class of producers, might and 
probably would operate in the opposite direction. 

" A high rate of interest no doubt affords a liberal reward of abstinence, 
and stimulates the saving of all who are ambitious of earning social posi- 
tion by their wealth. Again, if a man is in doubt whether to save in 
OTder to make provision for himself or his family, the expectation of a 



222 POLITICAL ECONOMY. 

289. The Eate of Interest tends to a Decline. — Despite 

the urgent and ever-recurring demands for the consumption 
of wealth in various forms of self-indulgence ; despite the 
occasional reversal of the course of accumulation, in the occur- 
rence of war ; despite all the effects of misgovernment and 
social disorder, wealth tends strongly to increase. Since the 
application of steam-power to manufactures and transporta- 
tion, this rate of increase has been so great as even to trans- 
cend the demand for the uses of wealth in undertaking new 
industrial and commercial enterprises, and thus, with some 
temporary exceptions, interest has tended to decline. 

In this respect interest differs markedly, we may say, essen- 
tially, from rent. The latter tends to rise, with the lapse of 
time, the increase of population, the growth of wealth. The 
former tends to decline under the same conditions. This con- 
stitutes one of the two reasons why the economist insists 
upon treating interest and rent separately in his discussion 
of the distribution of the product of industry. The second of 
these reasons will now be stated. 

290. There is not any No-Interest Capital. — We have 
seen (par. 255) that the whole theory of rent rests on the 
assumption that there is a body of no-rent lands. These serve 



high rate of interest may induce him to save ; because the higher the rate 
of interest, the larger the amount of future enjoyment which can be 
obtained by sacrificing a given amount of present enjoyment. 

" But the history of the past and the observation of the present show 
that it is a man's temperament, much more than the rate of interest to be 
got for his savings, which determines whether he makes provision for 
his old age and for his family, or not. Most of those who make such a 
provision would do so equally whether the rate of interest were low or 
high. And when a man has once determined to provide a certain annual 
income, he will find that he has to save more if the rate of interest is 
low than if it is high. Suppose, for instance, that a man wishes to pro- 
vide an income of £400 a year on which he may retire from business, or 
to insure £400 a year for his wife and children after his death. If the 
current rate of interest is 5 per cent., he need only put by £8,000 or 
insure his life for £8,000 ; but if it is four per oent., he must save £10,000 
or insure his life for £10,000." 



LOW HATES OF INTEREST. 223 

as the base from which to measure upwards the successive 
degrees of productiveness of the lands bearing rent. 

In the theory of capital there is nothing to correspond to 
this. The economist does not find any no-interest capital. 
In theory, all capital bears an interest, and all portions of 
capital bear equal interest. If one portion, in fact, brings no 
interest to its owner, or brings an interest below that obtained 
by the owners of other portions, this is because of misadven- 
ture, due to accident or erroneous calculation, not to the 
nature of the capital itself. 

Of course, it is anticipated by the political economist that 
the interest realized by portions of capital actually loaned will 
vary not a little, even within the same market, inasmuch as 
competition is never perfect in any sphere ; but what has 
been stated shows how fundamentally the theory of interest 
differs from that of rent. 

291. Is there a Minimum Rate of Interest ? — We have 
said that the inducement to save diminishes, other things 
equal, as the rate of interest falls. Is there a point at which 
the disposition to consume wealth for purposes of comfort or 
luxury will equal in strength the disposition to acquire an 
annual income by saving wealth for productive uses, so that no 
further accumulation will take place, the savings out of earn- 
ings thereafter being only sufficient to make good the waste of 
production and keep up the stock of capital ? 

If there is a minimum rate of interest, it is very low. Fif- 
teen or twenty years ago, six per cent, was the traditional rate 
of interest in New England, and probably few of us then 
thought that, if the rate were to go lower, it really would be 
worth while to " save." We had become so accustomed to 
six per cent, that it had come to seem as if there were some 
law of nature that fixed that rate. Six per cent. ? Why of 
course a man would get six per cent. ? Yet since that time 
we have seen the rate of interest steadily fall, in consequence 
of the vast accumulation of capital, till now loans of capital 
are to be had on good security at four and one-half or even 
four per cent., while the government borrows all it wants at 
three and one-half or even three. The English government 



224 POLITICAL ECONOMY. 

has long borrowed at three per cent. The government of 
Holland during the most nourishing period of the republic, 
was even able to borrow at two per cent. 

292. Income from Investments, how Computed. — Mis- 
apprehensions regarding the actual rate of interest are not 
infrequently occasioned by the failure to note, what would 
appear very plain, that the amount of interest paid upon bonds 
or notes, and the amount of dividends declared upon shares of 
corporate stock, should be compared, not with a nominal par 
value, but with the sum actually invested in the purchase of 
such bonds, stocks, notes or shares, or else with the sum for 
which these would at the time bring, if sold. 

Thus, we read in the newspapers, that the Boston and 
Maine railroad, in May, 1887, declared a semi-annual dividend 
of five per cent., being at the rate of ten per cent., a 
* year. 

This statement, by itself, might create the impression that 
investment in the stock of this road would be a peculiarly 
profitable one. A reference, however, to the stock quotations, 
in another column of the same newspaper, would have shown 
that the shares of this railroad were then selling at about 
$230, on the par of $100. A person, therefore, buying a share 
of this stock, in April, 1887, would have received but a trifle 
over four per cent., per annum, which was about the rate of 
interest then prevailing upon " bottom mortgages." 

On the other hand, a number of railroad companies, during 
the great speculative extension, 1868-1873, advertised to sell 
at seventy dollars, bonds for one hundred dollars, bearing 
seven per cent, interest. What, then, was the rate of interest 
promised on this investment ? Seven per cent. ? No : the 
rate of interest promised to be paid was ten per cent., and, 
even, as we shall see, more than that. The investor paid 
seventy dollars for a bond, to receive upon it annually seven 
dollars of interest, per year, until the bond should mature, and 
then to receive $100 in money, whereas he only paid down 
$70. In other words, he was, on the expiry of the bond, to 
receive a premium of $30, over and above an annual interest 
of ten per cent. The " present value " of this premium 



FALSE INTEREST : INSURANCE. 225 

would depend on the length of time the bond had " to 
run." 

293. False Interest : Insurance of the Principal.— A great 
deal that is paid under the name of interest is not interest in 
the true sense, but is merely a premium for the insurance of 
the principal sum lent. Real interest only comprises that 
part of the payment made which would be paid, were the 
return of the principal, at the date of the maturity of the obli- 
gation, a matter of reasonable certainty. Absolute assurance 
can be reached in no human transaction ; but where the risk 
is so small that it amounts to nothing in the mind of the 
lender, as in the case of British consols, or of a "bottom 
mortgage," where the sum lent is only a half or a third of the 
value of improved real estate, we have an instance of real in- 
terest, pure and simple. 

Whatever, in the same market, at the same time, is paid 
above this, for the use of capital, is of the nature of insurance 
against the risk of losing the amount lent. If the rate of real 
interest in London is 3 per cent., as determined by the price 
of consols, loans on various kinds of fair security may range 
from that rate up to 5 or 6 per cent. ; while all the time note- 
brokers are " shaving " the " paper " of second and third rate 
dealers at from 10 to 20 per cent, discount. 

294. Extra-Hazardous Risks. — The operation of the mind 
of the person who lends capital, at a high interest, upon poor 
security, is a familiar one. He sees the opportunity to obtain 
interest proper — the normal remuneration for forbearing to 
consume in immediate self-indulgence the wealth he has 
created, or come into possession of — without encountering any 
appreciable risk of losing the principal sum. But there is 
offered him a higher, perhaps a much higher, rate of interest, 
for a loan into which a chance of total loss enters. His mind 
balances the risk against the prize. The yearly value of the 
latter is definite. It is three, five or ten per cent, on the sum 
asked to be lent. Were he to receive this added interest for a 
sufficient number of years, he could even afford to lose the 
principal. He may receive the interest during the full term 
of the obligation, and then have his principal back again. He 



226 POLITICAL ECONOMY. 

knows also that lie may receive but one or two annual pay- 
ments of interest, and then be compelled to recognize his 
investment as a total loss. 

Of the degree of risk there is no measure. The ablest 
statistician, the first financier of the world, could give no 
mathematical statement of the chances for or against the ulti- 
mate repayment of the loan. The matter lies very vaguely 
even in the mind of the shrewdest banker or broker. He sees 
that there is great risk or little risk, very great risk or very 
little risk, or that the elements on which the ability of the bor- 
rower is to depend are altogether shrouded in uncertainty ; 
but as to giving a mathematical expression to the value of the 
loan, based on the chances of loss, the man who does this is 
deceiving either himself or some one else. 

295. With the great majority of lenders no calculation 
whatever, deserving of the name, enters into the negotiation 
of loans where more than double interest is paid. The capi- 
talist is simply tempted beyond what he is able to bear, or 
else, if a man of another temper, the enhanced inducement 
becomes of itself a reason for refusing to lend his money, and 
he shuts the door upon negotiation. Look at the hundreds of 
millions, the thousands of millions, that have been sunk in 
railway shares and mining stocks by persons who had not the 
smallest qualifications for estimating the value of the risk, but 
whose prudence gave way under an offer of ten, or twelve, or 
twenty per cent. Writers on Interest are too much given to 
assuming that the losses sustained in extra-hazardous invest- 
ments are balanced by the gains, and that the " average rate " 
is somehow maintained. The fact is, few lenders are capable 
of making any computation of the value of the risks they take ; 
few even go through the form of doing so. 

The only thing that can be said with assurance is that the vast 
majority of lenders on extra-hazardous risks are losers. The 
high rate of interest proves a snare. Tempted by the offer of 
12 or 20 per cent., they take risks for which 40 or 50 would 
be inadequate. Interest is paid, dividends are declared, just 
long enough to complete the subscription, just long enough to 
eecure the last gudgeon in the pool. And it is often astonish- 



EXTRA-HAZARDOUS LOANS. 237 

ing to note the class of men who contribute to a scheme which 
is in its very terms an insult to common-sense. Bought wit 
is the best wit ; but in this matter, experience seldom suffices 
for wisdom. The susceptibility to humbug is perennial in the 
human breast. After a dance of folly, in which figure " The 
Periwig Company, and the Spanish-Jackass Company, and the 
Quicksilver-fixation Company ; " in which prospectus vies with 
prospectus to see which shall be the more preposterous ; and in 
which investor vies with investor in recklessness, there comes, 
indeed, a resting spell, more through exhaustion of means than 
through acquired prudence ; but the first tingle of reviving 
activity in trade starts the fever of speculation anew, and the 
knaves find the dupes as numerous and as credulous as ever. 

298. The Wreckers of Trade. — The foregoing remarks apply 
to the great majority of investors who take extra-hazardous 
risks. Yet there are in every large commercial community 
those who reap enormous rates of interest with only rare losses 
to offset their gains. These are men with preternatural sagacity 
to know when it is safe to trust a rogue, how far to ride with 
a spendthrift towards his ruin, just the point at which to leave 
a tottering house whose foundations they have undermined by 
drains of exorbitant interest, just the moment at which to 
" unload " a stock ; men with the cunning to secure themselves 
against loss, whoever may suffer ; men who have the hardness 
to exact the last penny of their dues, at whatever distress to 
the debtor. Such men are the wreckers of trade. Their gains 
are great, for they reap the enormous profits of extra-hazardous 
risks, yet seldom lose in the principal sum lent. Rarely, in- 
deed, is an embarrassed firm saved by their aid. Resort to 
them is the almost certain precursor of ruin. It serves to delay 
the catastrophe a little, only to make it utter and remediless 
at the last. 

297. Double Interest.— The foregoing remarks apply only 
to extra-hazardous risks, where, to put it roundly, more than 
double interest is paid. With investments or temporary loans 
inside this limit, a different rule obtains. The rates of inter- 
est paid are still graded with little real appreciation of the 
degrees of risk taken ; the sums obtained as insurance can not 



228 POLITICAL ECONOMY. 

be assumed to be proportioned to the hazard ; yet it is gen- 
erally possible for an investor or lender to say, this is more 
safe than that : the adverse chances here are few and small ; 
are many and great there. 

But there is a more marked difference between extra-haz- 
ardous and ordinary risks in the loan of capital. With the former, 
the rates obtained are, as a whole, taking all classes of invest- 
ors or lenders together, below the actuarial value of the risks 
taken, and such loans and investments, in spite of the acute- 
ness of the professional money-lending class, result, as a body, 
in loss. With ordinary risks, the rates of interest are, on an 
average, above their true value, as estimated from the basis of 
bottom mortgages and government loans. 

For example, in England, a few years ago, the return from 
capital invested in government bonds was about 3.3 per cent.; 
while the savings banks realized on their investments, which 
may be assumed to have been made in a conservative spirit, 
A\ per cent., and the average return to investors in railway 
stocks was 5 per cent. Now, here is an undeniable case of 
disproportion. Any shrewd and sensible man, selling £ 100,000 
of consols, investing the proceeds in the shares of ten repu- 
table railways, and compounding through a term of years the 
extra 1 7 / 10 per cent., per annum, would create a fund far more 
than sufficient to offset any losses he might sustain in an in- 
dividual case. This disproportion is due first, to the estimation, 
higher than an actuarial value, placed by large classes of invest- 
ors upon the feeling of security, the absence of all apprehensions 
and occasional alarms, and, secondly, to the favor extended 
by the courts to the investment of trust funds in government 
bonds. 

298. Differing Rates of Interest in the Same Market. — 
We have laid down the proposition (par. 132) that in one 
market, at one time, there can be but one price for equal por- 
tions of the same commodity. The plain facts of interest 
seem to controvert this proposition. In the same market, at 
the same moment, the price paid for the use of capital may 
range from three per cent, upwards, to five, to ten, to twenty. 
Is this because between the portions of capital so loaned an 



DIFFERING RATES OF INTEREST. 229 

economic difference exists,' which creates a preference for one 
over the other, as when several different grades of flour are 
sold at several distinct prices ? No, the capital loaned may 
be, in all economic respects, uniform. A man having $30,000 
on deposit in a bank, may, on the same day, buy $10,000 
worth of " governments " which pay four per cent., invest in 
" railways " paying six per cent, dividends, to the same amount ; 
and loan the remainder at ten per cent, on personal security. 
Manifestly, between the three portions of capital loaned or 
invested, no economic differences existed. 

To what, then, is the phenomenon noted due ? In part to 
the cause discussed under the last head — the insurance of 
the principal sum lent. Twenty years ago there were on the 
stock market, in Lombard Street, three kinds of government 
securities : English consols, bringing, then, three and a quar- 
ter per cent, interest on the investment ; Russian bonds bring- 
ing five and a quarter per cent., and Turkish bonds bringing 
ten and a half per cent. Every day large amounts of these 
bonds were bought by Englishmen. Doubtless, some pur- 
chasers bought portions of each kind of securities. 

Inasmuch as the possibility of the English government 
becoming bankrupt, or tending to repudiation, is never admit- 
ted by an Englishman, the dividends received by holders of 
the " consols " constituted pure interest, the reward of absti- 
nence. The added two per cent, obtained from the Russian 
bonds represented the value, as viewed by the purchaser, of 
the insurance of his capital against the risk of loss attendant 
on loaning it to the government of a people, possessing great 
natural resources, indeed, and bound together by a strong na- 
tional feeling, but rude in manner, primitive in industry, with 
their political questions largely unsolved, and having points of 
possible collision with England. But while the Englishman de- 
manded five and a quarter per cent, per annum from the Rus- 
sian government, as the consideration for his loan, he exacted 
just twice that consideration from the Turkish government, 
though a government bound to Great Britain by the strongest 
ties of self-interest, because both the resources and the good 
faith of the Turkish government were reasonably suspected, 



230 POLITICAL ECONOMY. 

and its existence was dependent on support from foreign 
powers. 

299. Imperfect Competition in the Money Market.— 

We have in the foregoing paragraph used the expression, " as 
viewed by the purchaser." Hereby is indicated a considera- 
tion, which, while it is of importance in any market, is of 
especial importance in the market where capital is loaned, the 
so-called money-market. In quoting Prof. Jevons' statement 
of the reason, why, in the same market, at the same moment, 
all equal portions of a perfectly homogeneous commodity must 
bring the same price, we added that this proposition assumed 
perfect competition, all the conditions of a good market being 
fully realized. Now, perfect competition only exists where 
there is ample and accurate information. In bargains relating 
to the use of capital, so little is known by the parties respect- 
ing the supply of and the demand for capital, especially where 
usury laws drive borrowers and lenders to shifts and evasions ; 
so much more are men disposed to conceal the fact and the 
extent of their borrowing than of their buying ; so much does 
the repayment of the principal depend, in spite of law, upon 
the good faith of the borrower, that the market for the loan 
of capital can rarely be called a good market. 

All bargains in the " money market," as the market for the 
loan of capital is popularly called, take place necessarily upon 
information imperfect at the best, often of a private and con- 
fidential nature : hence it frequently happens that, in the same 
market, at the same moment, loans, upon equally good secur- 
ity, are made at different rates ; while it is not at all unlikely 
to occur, that, of two loans of unequal value, as to security, 
the more hazardous may be made at the lower rate of interest. 

300. Differing Rates of Interest in Different Markets.— Of 
course, all that has been said of differing rates of interest in 
the same market holds good of different markets ; but, wholly 
in addition of the causes which produce those differences, is 
reason found for different rates in distinct markets. Thus it 
is notorious that, for long terms of years, the loan of capital 
could be obtained, upon what was locally regarded as approved 
security, for 4 per cent, in London as freely as for 6 cent, in 



EMIGRATION OF CAPITAL. 23 1 

New York, or 8 per cent, in Chicago, or 12 per cent, in Iowa, 
or Kansas. 

Whence these differences ? In some degree, doubtless, these 
successive additions of interest, as capital passed westward, 
were of the nature of insurance on the principal sum lent. In 
each case, the security might be as good as could ordinarily be 
obtained in that community. Security, however, is a relative 
term; what would be deemed ample security in one place would 
not pass the scrutiny of lenders in another. The older the country 
the greater, other things equal, the permanence of economic rela- 
tions ; the more does industry settle down within traditional 
limits, and acquire a definite and calculable rate of increase ; 
the higher the value assigned to commercial reputation, the 
more carefully are the men selected who are to control the 
agencies of production and trade, the fewer the chances of 
revolutionary changes in business. 

301. Disinclination of Capital to Emigrate.— But not all, 
or even the greater part of the differences which have been 
noted, are due to this cause. It is the disinclination of capital 
to emigrate, which allows such wide differences in the local 
rates of interest. This disinclination is due to various causes. 
In part, it is the continuing effect of old laws, now generally 
abrogated, discriminating against aliens. In part, it is due 
to the suspicion that strangers may not be fairly dealt with by 
courts and by officers of the law, in case of seizures or fore- 
•losures. In part, it is due to the apprehension of the effect 
of international hostilities, which cause a suspension of inter- 
est-payments, if not forfeiture of the principal. In part, it is 
due to the fact that investments made at a distance must gen- 
erally be made through an agent, upon whose good faith 
or sound judgment may depend the fate of the principal 
invested. 

While these and other causes may operate, singly or in con- 
junction, to create local differences of interest, the main cause 
of such differences is found in the inertia of the owners of capi- 
tal, making them ready to accept lower rates upon the spot 
than could perhaps be obtained with no less safety, through 
inquiry and effort at a distance, and, secondly, in the necessary 



232 POLITICAL ECONOMY. 

lack of information as to prevailing rates of interest and 
existing degrees of security for the principal. 

I remember to have read somewhere an estimate by an 
economist of reputation, fixing this " disinclination of capital 
to emigrate " at two per cent. It is doubtful, however, 
whether the matter is subject to any such form of statement. 
The disinclination to invest capital abroad must differ among 
men of different races ; it must differ with differing condi- 
tions respecting the communication of news, and respecting 
international relations. Indeed, it must differ widely with 
differing moods of the public mind. At times, it may disap- 
pear altogether under the excitement of speculative mania, 
as in the days of the South Sea Bubble, and in the year pre- 
ceding the English crisis of 1825. It sometimes seems to 
be the case that loans and investments are made abroad more- 
freely than at home, probably because it is less easy to detect 
the fallacy of schemes bearing foreign names, and relating to 
distant lands. 



CHAPTER IV. 

PROFITS. 

302. Definition of Profits. — We have now seen two shares 
cut off the product of industry — rent and interest ; two 
claimants satisfied — the landlord and the capitalist. 

We now come to inquire respecting the share of the 
Employer, who organizes and conducts production, deciding 
what shall be produced ; in what amounts, of what varieties, 
materials and patterns ; and to what persons, at what prices, 
and on what terms of payment, the products shall be sold. 

303. The Entrepreneur or Employing Class. — We have 
seen that in a primitive state of industrial society the em- 
ployer does not appear. When, however, the forms of 
production become many and complex; when the hand-tool is 
replaced by the machine ; when many persons, of various 
degrees of skill, strength and intelligence, are united in the 



THE EMPLOYING FUNCTION. 233 

same industrial operation ; when the materials consumed are 
gathered from distant lands, and the products, in turn, 
are distributed widely to consumers not known to the 
producer, and are sold largely upon credit ; when, moreover, 
a few simple, standard styles give way to ever-varying fash- 
ions, in material, in form, in color : in such a state, the em- 
ployer, the master, the entrepreneur, becomes a necessity of 
the situation. He performs a function which is indispens- 
able to a large and varied production, and for so doing 
receives a remuneration which we call profits. 

304. Unfortunately, as it seems to me, the entrepreneur or 
employing function has not been adequately treated, if, indeed, 
it has been in the smallest degree recognized. English and 
American economists, in general, have chosen to regard the 
capitalist as the employer of labor, that is, as employing 
labor merely because of the possession of capital, and to the 
extent only to which he possesses capital. We have just now 
said that, in an early stage of industrial society, the employer 
does not appear in distinct shape. The possession of capital 
there constitutes a sufficient qualification for the employment 
of labor. 

In the later stages of industrial development, the mere 
possession of capital no longer constitutes the sole, or even 
the main qualification for employing labor. The laborer no 
longer looks to the employer to furnish merely food and tools 
and materials, but to furnish, also, technical skill, commercial 
knowledge and powers of administration ; to assume responsi- 
bilities and provide against contingencies ; to shape and direct 
production and to organize and control the industrial machin- 
ery. So important and difficult are these duties, so rare are 
the abilities they demand, that he who can discharge these 
will generally find the capital required. If he be the man to 
conduct business,* food, tools, and materials will not, under 
our modern system of credit, long be wanting to him. On the 

* " Many employers of labor, in some parts of England more than half, 
have risen from the ranks of labor. Every artisan who has exceptional 
natural abilities has a chance of raising himself to a post of command." 
— Marshall's " Economics of Industry." 



234 POLITICAL ECONOMY. 

other hand, without these higher qualifications the mere pos- 
sessor of capital will employ labor at the risk, almost the 
certainty, of total or partial loss. 

The employer, the entrepreneur, thus rises to be the master 
of the situation. It is no longer true that a man becomes the 
employer of labor because he is a capitalist. Men command 
capital because they have the qualifications to employ labor. 
To men so endowed, capital and labor alike resort, for the 
opportunity to perform their several functions and to entitle 
themselves to share in the product of industry. By this is 
not meant that the employer is not, in any case, or to any 
extent, a capitalist, but that he is not an employer to the 
extent only to which he is a capitalist, nor is he an employer 
at all because he is a capitalist. 

305. Use of the word Profits by English and American 
Economists. — As the English and American economists gen- 
erally leave the entrepreneur out of their discussion of produc- 
tion, so they leave out of view the share of the entrepreneur 
in treating of the distribution of wealth. " Profits " come to 
mean only the remuneration for the use of capital, what we 
call distinctively interest ; or, if it be recognized that the man 
who organizes and conducts industrial operations receives 
something over and above the mere return upon that portion 
of the capital employed by him which he owns in his own 
right, that something is disparaged by being termed " the 
wages of supervision and management." 

Now it is fundamental in my theory of distribution that the 
entrepreneur class, the employers of labor, receive a share of 
the product of industry which is so important, through its 
amount, that it can not possibly be omitted from consideration, 
and so widely different in the principles by which it is gov- 
erned, that the term wages can not be applied thereto without 
inducing a wholly unnecessary and mischievous confusion of 
ideas, leading directly to false results. 

To the entrepreneur's share of the product of industry I 
shall strictly apply the term profits. This use of the term, in 
my judgment, tends to promote clearer conceptions regarding 
the distribution of wealth in the modern industrial state. 



PROFITS AKIN TO KENT. 235 

300. Profits a Species of the Same Genus as Kent. — In 
my opinion, profits thus defined bear a strong resemblance to 
rent. In this view I follow Archbishop Whately, who, in the 
appendix to his treatise on Logic, declares that the rent of 
land is only a species of an extensive genus, although, as he 
complains, the English economists have treated it as constitu- 
ting a genus by itself, and have either omitted its cognate 
species, or have included them under genera to which they do 
not properly belong. If this view is correct, the principles 
deduced therefrom will be of very great consequence, not 
only to political economy, but to social philosophy. Let us, 
therefore, state again the essential differences between Rent 
and Interest. 

1st. A portion of the land cultivated for the supply of any 
given market, bears no rent ; this we call the no-rent land. 
The rent paid for any piece of land is exactly measured, in 
theory, by its excess of advantages in production, over the 
advantages in production pertaining to the no-rent land. On 
the other hand, there is not any no-interest capital. It is true 
that a person lending capital may not only not obtain, in the 
result, any interest for its use, but may even lose the princi- 
pal ; but this will be due to violence or fraud, to flood or fire 
or stress of weather, or, else, to the unsuspected incompetency 
of the borrower to conduct business, all of which we may sum 
up in the word accident. There is no reason why such acci- 
dents should befall one portion of capital and not another, 
whereas there is a reason, in the nature of the case, why one 
piece of land should bear a rent and another not ; why one 
piece should bear a high and another a low rent. Theoreti- 
cally all capital bears interest ; and, theoretically also, all 
capital bears the same rate of interest, exceptions being either, 
first, apparent only, as when an additional per cent, is charged, 
not as interest proper, but for the insurance of the principal, 
or secondly, those arising from the disinclination of capital to 
emigrate, from the ignorance or inertia of lenders and bor- 
rowers, or from the force of laws interfering with contracts 
of loan. 

2nd. It follows that interest forms a part of the price of 



236 POLITICAL ECONOMY. 

all products, but that rent forms no part of the price of agri- 
cultural produce (for the demonstration of this theorem, see 
par. 262), and that the amount received by the landlord, as 
rent, is not paid either by the agricultural laborer, or by the 
consumer of the produce. 

307. Profits Governed by the same Law as Rent. — 
Having restated the essential distinction between interest and 
rent, I shall now undertake to show that profits, the remunera- 
tion of the entrepreneur or employer, partake largely of the na- 
ture of rent, being a species of the same genus. So far as this 
is the case, profits do not form a part of the price of the prod- 
ucts of industry, and do not cause any diminution of the 
wages of labor. 

The successful conduct of business, under free and active 
competition, is due to exceptional abilities or to exceptional 
opportunities. Whether due to exceptional abilities or to 
exceptional opportunities, my proposition could be equally 
well established, just as it makes no difference in the theory 
of rent whether a piece of land owes its superior advantages 
for the purposes of cultivation to higher natural fertility, or 
to closer proximity to the market to be supplied. Yet it can 
not be a matter of indifference to social philosophy, whether 
the power to command profits be due to exceptional abili- 
ties or to exceptional opportunities ; and I may, therefore, be 
pardoned for pausing to point out that the former are far 
more efficient than the latter, in securing profits. 

To justify this assertion it will be enough to refer to the 
well-known fact that a great majority of all business houses 
which have achieved notable success have been founded by 
men who owed almost nothing to opportunity. On the other 
hand, nothing is more familiar than the spectacle of great 
houses, deeply founded, which have enjoyed high prestige, 
wide connections and large accumulated capital, dwindling 
away little by little, if not brought abruptly to their downfall, 
under the successors of the original founder, simply because 
the management which had been strong and brave and wise> 
became commonplace, purposeless, timid and weak. All this 
is so familiar that I do not fear that any American, at least, 



THE ORIGIN OF PROFITS. 237 

will question the assertion that exceptional abilities have far 
more to do with the successful conduct of business, than excep- 
tional opportunities. 

Inasmuch as it would make no difference whether profits 
were due to exceptional abilities or to exceptional opportuni- 
ties, while the former are, in fact, much the more important 
factor in the successful conduct of business, I shall, hereafter, 
for convenience and simplicity, speak of profits as due to ex- 
ceptional abilities, just as in discussing the question of the use 
of the land, we speak of rent as due to differences in fertility, 
assuming, for convenience of illustration, all the fields under 
view to be in equal proximity to the market. 

308. A Theoretical No-Profits Stage of Production*— If 
the number of men of exceptional abilities were sufficient or 
more than sufficient to do all the business that required to be 
done, of all sorts and in all places ; if (2) these men, however 
much surpassing all other members of the industrial society, 
were among themselves equal in all respects which concern 
the conduct of business ; and if (3) this class, so constituted 
and so endowed, were distinguished from all not of their class 
so clearly and conspicuously that no one having these exceptional 
abilities should fail to be recognized, and no one lacking such 
abilities in the full measure should esteem himself capable of 
conducting business, or be so esteemed, for the purpose of 
obtaining credit, we should have a situation closely analogous 
to that which we described(par. 255)in the case of a communit}^ 
near which was found an amount of good land, of uniform 
quality, adequate, or more than adequate, to raise all produce 
required for the support of the community. 

The result would be, either that this class would, by form- 
ing a combination and scrupulously adhering to its terms and 
its spirit, create and maintain a monopoly price for their ser- 
vices in conducting the business requiring to be done, which is 
so improbable as to be altogether out of our contemplation, or 
they would, by competing among themselves for the amount 
of business, bring down its rate to so low a point that the 
remuneration of each and every one of this class would be prac- 
tically equal to what he would receive if employed by another. 



238 POLITICAL ECONOMY. 

This, which we might call the " no-profits " stage of industrial 
society, corresponds closely to the " no-rent " stage in the 
cultivation of the soil. The persons remaining in the conduct 
of business would earn their necessary subsistence, but no> 
more. Economically it would make no difference to them 
whether they did this, as employers or employed. 

309. — In fact, however, the qualifications for the conduct 
of business are not equal throughout all of a sufficiently numer- 
ous class. On the contrary, the range of ability is almost 
world-wide. First, we have those rarely-gifted persons who, 
in common phrase, seem to turn every thing they touch into 
gold ; whose commercial dealings have the air of magic ; who 
have such insight as almost to seem to have foresight ; who 
are so resolute and firm in temper that apprehension and alarms 
and repeated shocks of disaster never cause them to relax . 
their hold or change their course ; who have such command 
over men that all with whom they have to do acquire vigor 
from the contact and work for them as they would not, perhaps 
could not, work for others. 

Next below, though far below, we have that much larger 
class of men of business, of a high order of talent, though 
without genius or any thing savoring of magic, whose unquali- 
fied success is easily comprehended, even if it can not be 
imitated : men of natural mastery, sagacious, prompt and 
resolute. 

Then we have the men who, on the whole, do well, or pretty 
well, in business : men who enjoy a harmonious union of all the 
qualities of the entrepreneur, though only in moderate degree, 
or in whom some defect, mental or moral, impairs a higher order 
of abilities ; men who are never masters of their fortunes, are 
never beyond the imminence of disaster, and yet, by care and 
pains and diligence, win no small profits from their business, 
and, if frugality be added to their other virtues, accumulate 
in time large estates. 

Lower down in the industrial order are a multitude of men 
who are found in the control of business enterprises for no 
good reason : men of checkered fortunes, sometimes doing well, 
but more often ill ; some of them, perhaps, filling a place that 



THE NO-PROFITS EMPLOYER. 239 

would not otherwise be filled, but, more commonly in business 
because they have forced themselves into it under a mistaken 
idea of their own abilities, perhaps encouraged by the partial- 
ity of friends Avho have been willing to place in their hands the 
agencies of production, or intrust them with commercial or 
banking capital. The industrial careers of these men are not 
peculiarly happy, though the degree in which they suffer from 
the constant imminence of loss, perhaps of bankruptcy, is very 
much a matter of temperament. Some take it extremely hard, 
and when they fall make no effort to rise again ; others are 
irrepressible as Harlequin, jumping up, alert as ever, after 
being apparently hanged, drawn and quartered by the common 
executioner. 

310. The No-Profits Class of Employers. — Now, in my 
view of the question of profits, we find, in the lower stratum 
of the industrial order thus rudely and hastily sketched, a 
"no-profits" class of employers. Notwithstanding all the 
magnificent premiums of business success, the men of real 
business power are not so many but that no small part of the 
posts of industry and trade are filled by men inadequately 
qualified, and who, consequently, have a very checkered career 
and realize for themselves, taking their w T hole lives together, 
a meager compensation, so meager that, for purposes of scien- 
tific reasoning, we may treat it as constituting no profits at 
all. Live they do, partly by legitimate toll upon the business 
that passes through their hands, partly at the cost of their 
creditors, with whom they make frequent compositions, partly 
at the expense of friends, or by the sacrifice of inherited 
means. This bare subsistence, obtained through so much of 
hard work, of anxiety, and often of humiliation, we regard as 
that minimum which, in economics, we can treat as nil. From 
this low point upwards, we measure profits. 

311. Profits do not form a part of the Price of Manufac- 
tured Products. — If this view of the employing class be cor- 
rectly taken, it appears that, under perfect competition, that 
is, where the conditions of a good market are supplied, manu- 
facturing profits, for instance, are not obtained through any 
deduction from the wages of mechanical labor ; and, secondly, 



24° POLITICAL ECONOMY. 

manufacturing profits do not constitute a part of the price of 
manufactured goods. All profits are drawn from a body of 
wealth which is created * by the exceptional abilities (or op- 
portunities) of those employers who receive profits, measured 
from the level of those employers who receive no profits, just 
as all rents are drawn from a body of wealth, which is created 
by the exceptional fertility (or facilities for transportation of 
produce) of the rent-lands, measured from the level of the no- 
rent lands. 

The price of manufactured goods of any particular descrip- 
tion is determined by the cost of production of that portion 
of the supply which is produced at the greatest disadvantage 
(par. 137). If the demand for such goods is so great as to 
require a certain amount to be produced under the manage- 
ment and control of persons whose efficiency in organizing 
and supervising the forces of labor and capital is small, the 
cost of production of that portion of the stock will be large, 
and the price will be correspondingly high, yet, high as it is, 
it will not be high enough to yield to the employers of this 
grade any more than that scant and difficult subsistence which 
we have taken as the no-profits line. 

The price at which these goods are to be sold, however, 
will determine the price of the whole supply, since, in any one 
market, at any one time, there is but one price for different 
portions of the same commodity. Hence, whatever the cost 
of production of those portions of the supply which are pro- 
duced by employers of a higher industrial grade, they will 
Command the same price as those portions which are produced 
at the greatest disadvantage. The difference, so measured, 
will go as profits to each individual employer, according to 
his own success in production. 

312. Profits are not Subtracted from Wages. — Do profits, 
then, come out of wages ? Not at all. The employers of the 
lowest industrial grade — the no-profits employers, as we have 

*Prof. Alfred Marshall says: "The earnings of management of a 
manufacturer represent the value of the addition which his work makes 
to the total produce of capital and industry." 



THE ORIGIN OF PROFITS. 24 1 

called them — must pay wages sufficient to hire laborers to 
work under their direction. These wages constitute an essen- 
tial part of the cost, to the employer, of the production of the 
goods. The fact that these wages are so high is the reason 
why these employers are unable (their skill and power in organ- 
izing and energizing labor and capital being no greater than 
they are), to realize any profits for themselves. 

The employers of the higher industrial grades will pay the 
same wages to their laborers. Why, in equity or in econo- 
mics, should a laborer who works for a strong, prudent and 
skillful master, receive higher wages than one whose fortune 
it is to work for a vacillating, weak or reckless employer. 
The one laborer is as efficient as the other, and works as hard. 
The difference in production, which, in the one case allows rent 
to be paid, and in the other enables the employer to secure a 
profit, is due to no superiority in the quality of the labor or 
the capital employed, over that of the labor and the capital em- 
ployed where no rents or no profits are realized. In the one 
case it is due to the superior fertility of the land, or its greater 
facilities for the transportation of produce ; in the other, to 
the superior abilities or opportunities of him who conducts 
industry. 

In the latter case, the employer, paying wages at the same 
rate to his laborers, and interest, at the same rate, to the capi- 
talist, for so much as he has to borrow, and selling his goods, 
so far as they are of equal quality, at the same price as the 
employer who makes no profits, is yet able to accumulate a clear 
surplus after all obligations are discharged, which surplus is 
called profits. This is effected by his careful study of the sources 
of his materials ; by his comprehension of the demands of the 
market ; by his steadiness and self-control in the presence of 
temptations to extravagance or wild ventures ; by his organiz- 
ing force and administrative ability ; by his energy, economy 
and prudence. 

313. The No-Profits Employer.— A failure to discern the 
true relations of profits to wages has led to a mistaken appre- 
ciation of the interests of the community, and especially 
of the laboring classes, regarding the employers of labor. 



242 POLITICAL ECONOMY. 

While the large profits of the successful employer have been 
the subject of much jealousy, and almost uniformly excite in 
the minds of the unthinking the sense of personal wrong, there 
is an entire lack of jealousy exhibited towards the unsuccessful 
man of business, who often receives a great deal of sympathy 
from the laboring class. 

So far as the sympathy extended towards the unsuccessful 
man of business is of a personal nature, flowing from a kindly 
disposition towards the unfortunate, it is, of course, very amia- 
ble. But there is reason to believe that this sentiment is not 
wholly of a good origin, but is quite as largely produced by a 
misapprehension of economic relations. The laborers appre- 
ciate, in some degree, the cares under which the unsuccessful 
employer labors, the anxieties from which he suffers, the 
humiliation into which he is occasionally plunged. They 
know he has a pretty poor time of it on the whole, and they 
are not envious of him. On the contrary, they use his hard lot 
to sharpen their envy of the man who reaps large profits from 
the conduct of business and the employment of labor. They 
compare the rich rewards of the one, who, perhaps, in time, 
becomes worth his millions, with the meager recompense of 
the other, who, at the end of a long life of labor, has little to 
show for it all ; and the comparison tends to heighten the 
feeling of loss and of wrong with which the gains of the 
former are contemplated. 

If, however, we have rightly indicated the source of profits, 
not only is the unsuccessful employer deserving of no special 
economic sympathy, but his conduct of business, his control 
of labor-force and capital-force is at a great cost to the labor- 
ing class, as forming a part of the general community. 

We saw that rents were measured upward from the produc- 
tive level of no-rent land. If, therefore, that level is lowered, 
rents are, (par. 257) by that fact raised. Similarly, profits 
are measured upwards from the level of the no-profits class of 
employers ; and any cause which brings incomeptent persons 
into the conduct of business, or keeps them there against the 
natural tendency of trade to throw them out, increases the 
profits of the successful employers, as a class, by enhancing 



INCOMPETENT EMPLOYERS. 243 

the cost of production and, consequently, the price of that 
portion of the supply which is produced at the greatest dis- 
advantage. This enhancement of price is at the expense of 
all who consume the goods so produced ; the laboring class 
equally with others, in theory ; probably in fact more than 
any other, on account of their limited ability to look out for 
their own interests in retail trade. 

314. What Causes Help to Swell the Proportion of In- 
competent Employers of Labor?— Shilly-shally laws relating 
to insolvency do this ; bad money does this ; truck does this ; 
protection, in my judgment, does this. Each of these causes 
enables men to escape the consequences of incompetency, and 
to hang miserably on to business, where they are an obstruc- 
tion and a nuisance. Slavery, in like manner, enables men to 
control labor and direct production, who never would become, 
on an equal scale, the employers of free labor ; and it is not 
more to the inefficiency of the slave than to the incompetency 
of the master, that the unproductiveness of chattel labor is 
due. 

The lower the industrial quality of free labor, the more 
ignorant and inert the individual laborer, the lower may be the 
quality of the men who can just sustain themselves in the 
position of employers. Men become the employers of cheap 
labor who would never become the employers of dear labor, 
and who ought not to be the employers of any sort of labor. 
The more active becomes the competition among the wages 
class, the more prompt their resort to market, the more per- 
sistent their demand for every possible increase of remunera- 
tion, the greater will be the pressure brought to bear upon 
Biich employers to drop out of the place into which they have 
crowded themselves at the cost of the general community, 
and where they have been able to maintain themselves only 
because the working classes have failed, through ignorance or 
inertia, to exact their full terms. 

315. Importance of this View of Profits. — It is compe- 
tent to any person to dissent from the view of the origin and 
measure of business profits I have presented ; but it can not 
be gainsaid that, if that view be accepted as correct, we have 



244 POLITICAL ECONOMY. 

here the keystone of the arch, which completes the structure 
and binds together the other members into a symmetrical whole 
spanning the entire field of distribution. We shall not, how- 
ever, be able to appreciate all the consequences of this theory, 
until we have carried our studies through the subject of wages, 
the remuneration of labor. 

316. Getting Rid of the Employer.— In the department of 
Production we described the function of the entrepreneur, or 
employer, the person who, hiring labor on the one hand, and 
borrowing capital on the other, initiates industrial operations 
according to his own plans, and with a view to his own econo- 
mic benefit. Coming down to the department of Distribution, 
we have, but just now, inquired how the contemplated benefit 
is secured by the employer, and what are the limits of that 
benefit, which we term profits. 

It has been said, in the course of this discussion, that this 
benefit obtained by the employer, his profits, has been the 
object of not a little jealousy and envy on the part of the labor- 
ers and capitalists to whom he has paid wages or interest. 
Those wages and that interest the recipients would be glad to 
see increased by some addition derived from the source from 
which the employer obtains his profits. This could only be 
done by the laborers and the capitalists combining to perform 
the employer's work in production, and thereby becoming 
entitled, or perhaps we had better say enabled, to claim his 
share of the product in distribution. 

317. Co-operation. — Organized and systematic efforts to 
get rid of the entrepreneur or employer have not been un- 
known. Among the many schemes for largely and rapidly 
improving the condition of the masses of the people, which 
had their birth in the period of social and political fermenta- 
tion which we call the Revolution of 1848, none had fairer 
promise of substantial results than that known by the name 
of Co-operation. 

Generically, co-operation is a term of wide application, and, 
in its use in political economy, may express the union of indus- 
trial agents in production upon any terms and under any 
■system of organization. Since the period referred to, how- 



WAGES. 245; 

ever, the term has come to have a limited signification, con- 
fined to an industrial organization from which the entrepreneur 
is excluded, and under which the product of industry is again 
to be divided into three principal shares, instead of four as 
under the entrepreneur system. I here only indicate the place 
which co-operation occupies in the scheme of Distribution,, 
postponing the discussion of the scheme to Part VI. 



CHAPTER V. 

WAGES. 

318. Definition of Wages. — We have seen three shares cut 
off the product of industry. Of the four principal parts* into 
which that product is divided, under the entrepreneur organi- 
zation, as existing almost universally in England, and as 
rapidly extending in the United States, on the continent of 
Europe, and in all' progressive countries, there remains but one 
to be treated, Wages, the remuneration of labor. 

Before seeking the law which governs wages, two distinc- 
tions require to be drawn very clearly, distinctions which the 
reader will need to hold strongly in mind through the whole< 
course of our future discussion, the distinction, viz., between J 
real andjiammaTwages, and that between the real and the / 
nominal c ost o f labor. 

319. Real and Nominal Wages. — Real wages are the re- 
muneration of the laborer"" as" reckoned in the necessaries, 
comforts and luxuries of life. 

Real wages may differ widely, even when nominal wages 
are of the same amount, by reason of : 
^j^o) Variations in the purchase power of money. 

(b) Varieties in the form _oTpayment^ as when the board of 
thTlaborer, the rent of a cottage, the privilege of grazing a 

* Certain minor shares in distribution will be treated in the next chap- 
ter. For the purposes of the present discussion they may safely be dis- 
regarded. 



246 POLITICAL ECONOMY. 

cow, allowances of certain quantities of food, drink or fuel, 
the right to take flour at miller's prices, one or more of these, 
are added to the money wages of the laborer. Such forms of 
payment are not of much importance throughout the United 
States, generally, at the present time ; but in many European 
countries they constitute elements which can not be over- 
looked in discussing the question of comparative wages. In 
England, a series of acts of Parliament, extending over four 
hundred years, have successively restricted the right of the 
employer to pay wages in aught but the coin of the realm. 
^fil The greater opportunities in some avocations than in 
others for extra earnings by the laborer himself or by the 
members of his family. Thus, Prof. Senior says : " The earn- 
ings of the wife and children of many a Manchester weaver 
exceed or equal those of himself. Those of the wife and chil- . 
dren of an agricultural laborer, or of a carpenter or coal- 

[ heaver, are generally unimportant." The true unit in the 

^comparison of wages is evidently the family. 

320. {d) The greater regularity of employment in some 
avocations than others. Varying regularity of employment 
may be due to (1) the nature of the individual avocation, (2) 
the force of the seasons, (3) social causes, (4) industrial causes, 
like strikes, panics, and so-called " hard times." 

In illustration of the foregoing causes, we have the widely 
varying rates of agricultural wages from one season to 
another, being often, e. g., more than twice as great in the 
third as in ihe first quarter of the year. This is due to both 
of the first two causes adduced. It is not alone the difference 
of the seasons, which makes agricultural wages sol irregular ; in 
part, also, it is the nature of the operations involved. After 
the seed has been planted, time must be given it to grow, and 
this would be so were there no winter. So in the fisheries, it 
is not alone the stress of weather which obliges the laborer to 
lie idle during portions of the year, but, in part, the reproduc- 
tive necessities of the fish. In other avocations it is the force 
of the seasons alone which makes employment irregular, as, 
for example, in the brickmaking, quarrying, carpentering, 
house-painting, and other trades. 



COST OF LABOR. 247 

Among social causes affecting the regularity of employ- 
ment, as between country and country, may be mentioned the 
observance of festivals and religious rites, which among some 
peoples occupy a hundred and more days in the year. 

(e) The longer duration of the labor power in some avoca- 
tions and some countries, than in others. 

Thus, Dr. Neison has shown that the mean mortality in 
England between 25 and 65 years of age, is, in the clerical 
profession 1JJ per cent. ; in the legal, 1.57 ; in the medi- 
cal, 1.81. In domestic service, the mortality among garden- 
ers, is but .93 per cent. ; among grooms, 1.26 ; among 
coachmen, 1.84. Of the several branches of manufacture, 
paper shows a mean mortality of 1.45 ; tin, 1.61 ; iron, 1.75 ; 
glass, 1.83 ; lead, 2.24 ; earthenware, 2.57. Among the different 
kinds of mining, iron shows a mean mortality of 1.80 ; tin, 
1.99; lead, 2.50 ; copper, 3.17. 

Dr. Edward Jarvis has shown that, on the average, an Irish- 
man who has reached the age of 20, has 28.88 years to live ; a 
Frenchman, 32.84 ; an Englishman, 35.55 ; a Norwegian, 
39.61. 

It is evident that if two persons begin to labor productively 
at the same period of life and continue at work until death, 
at the same nominal rate of wages, that one receives the 
higher real remuneration who lives the longer, inasmuch as 
the cost of his maintenance during the first unproductive 
years of life, must, in any philosophical view of the subject, be 
charged upon his wages during his period of labor. 

321. Nominal and Ileal Cost of Labor. — Another distinc- 
tion which requires to be observed is that between wages and 
the cost ofjabor. 

In treating wages as high or, low,- we occupy the laborer's j 
poi nt of ^ view. In treating the cost of labor "as high or low,/ 
we occupy the point of view of .the,. employer. 

Wages are high or low according to the abundance or the j 
scantiness of the necessaries, comforts and luxuries which the j 
laborer can command. The cost of labor is high or low, 
according as the employer gets an ample or a scantyireturn for 
the wages he pays the laborer, whether these be low or high. 



248 POLITICAL ECONOMY. 

It is possible that an employer may pay high wages, and yet 
the cost of labor to him may prove to be low, by reason of the 
laborer's superior efficiency. On the other hand, the employer 
may pay wages on which the laborer can only live most miser- 
ably, and yet the employer be greatly straitened to get back 
. these wages in the value of his product, so poor and wasteful 
may be the services rendered. 

In Part II. we have explained at great length the causes 
which affect the laborer's efficiency. 

It is probably true that, as a rule, the highest paid labor is 
that which costs the employer least. This is evidenced by the 
two facts that, generally speaking, employers, when they 
reduce their force, discharge their lowest paid laborers first ; 
and that, generally speaking, it is the countries where the low- 
est real wages are paid which feel the necessity of imposing 
commercial restrictions to keep out the products of others. 
Thus, India, where the cotton spinner gets only 20 pence a 
week, is flooded by the cottons of England, where the spinner 
receives 20 shillings ; and Russia, where the laborer in iron 
works receives but three roubles a week, has to protect her- 
self, or thinks she must do so, against the iron of England, 
where the workman receives four or five times as much. 

322. Relation of Wages to the Other Shares of the 
Product of Industry.— It has not been by accident, or whim, 
or from any notion respecting the comparative dignity of the 
several claimants to the product of industry, that rent, inter- 
est, and profits have been discussed before wages. 

This order has been followed for a positive reason, which is 
that, in the theory of distribution here proposed, .wages equal 
the produc t of -industry minus the three parts already dete rm- 
ined in their natur e and amou nt. In this view, the laboring 
class receive all they help to produce, subject to deduction on 
the three several accounts mentioned. 

323. Rent Deducted.— -First, rent is to be deducted. On 
the lowest grade of lands there is no rent. On the more pro- 
ductive soils rent, at its economic maximum, equals the excess 
of produce after the cost of cultivating the no-rent soils has 
been paid. This rent does not affect the price of agricultural 



THE LABORER'S SHARE. 249 

produce, and does not come out of the remuneration of the 
agricultural laborer. 

We thus see that the first deduction to be made from the 
product of industry is of a perfectly definite nature, and that, 
on the assumption of active competition on both sides, the 
amount of, that reduction is susceptible of arithmetical com- 
putation. Rent must come out before tb,e question of wages 
is considered. The laborer can not get it, or any part, of it, by 
any economic means. It must go to the land-owner, unless it 
be confiscated by the State, or ravished away by violence. 

324. Interest Deducted.— Secondly, from the product of 
industry must be deducted a remuneration for the use of capi- 
tal. That remuneration must be high enough to induce those 
who have produced wealth to save it and store it up, in the 
place of consuming it immediately for the gratification of per- 
sonal ap petites o r tastes. This may imply, in one state of 
society, an annual .rate of interest of eight per cent.; in 
another, of five ; in another, of three. 

325. Profits Deducted.— The third and last deduction to 
be made from the product of industry before the laborer 
becomes entitled thereto, is what we have called profits, the 
remuneration of the entrepreneur, the employer, the man of 
business, the captain of industry, who setsTin motion" the com- 
plicated machinery of modern production. 

From the importance assigned, in this work, to the entre- 
preneur's or employer's function, the conclusion might be hast- 
ily drawn that production would be primarily for his benefit, 
that he, if any one, would be the residual claimant upon the 
product ; that, paying the capitalist^ oh"one^side, enough, 
under the name of interest, to secure ^the use of his capital, 
and paying the laborer, on the other side, e,nough, under the 
name of wages, to secure his services, this man of business, 
captain of industry, merchant, manufacturer, or banker, would 
retain as his own all that remains. And so, indeed, in any 
individual transaction he does, owing to the force of contract, 
just as the farmer, under a lease, pays the owner of the soU 
no more in years when the yield is exceptionally large, and no 
less in years when the crops are short. 



250 POLITICAL ECONOMY. 

If, however, we have correctly indicated the source of the 
\ employer's profits, they are of the same nature ag^ rent. As 
there are no-rent lands, so there is a class of employers who 
derive from the business they conduct a bare subsistence, at 
the cost of much anxiety, and perhaps also of discredit, many 
of them living mainly at the expense of their creditors. These 
we call the no-profits employers. 

From this point, where profits, if any, are so small and so 
hardly earned that they may, for scientific purposes, be dis- 
I regarded, upwards through many grades, we have employers 
' who derive moderate profits, liberal profits, grand profits, 
monumental profits aggregating in a lifetime colossal for- 
tunes, according to the degrees in which they bring courage, 
prudence, foresight, frugality, and authority over men, to the 
organization and conduct of business enterprises. If I am right, 
in this view of the nature of the entrepreneur's function and 
of the source of his profits, those profits would, under full and 
free competition, not form a part of the price of commodities, 
and are not obtained by deduction from wages. In other 
words, these profits consist wholly of wealth created by the 
individual employers themselves, over and above the wealth 
which would have been produced, in similar industrial enter- 
prises, by the same labor-force and capital-force under the 
control of employers of less efficiency. 

326. The Laborer, the Residual Claimant to the Product 
of Industry. — These three shares being cut off the product of 
industry, the whole remaining body of wealth, daily or annu- 
ally created, is the property of the laboring class ;* their 

* This is substantially the position taken by the lamented Prof. Stanley 

Jfeyons, of University College, London, who states that " The wages of a 

working man are ultimately coincident with what he produces, after the 

j deduction of rent, taxes, and the interest of capital." In this matter of 

j Wages, Prof. Jevons emphatically repudiates the doctrines generally 

\ accepted in his own country, saying : ' ' Our English Economists have 

been living in a fool's paradise," and frankly ranges himself with the 

French economists, "from Condillac, Baudeau, and Le Trosne, through 

J. B. Say, DeStutt Tracy, Storch, and others, down to Bastiat and Cour- 

celle Seneuil." 

" The truth," he declares, "is with the French School, and the sooner 



THE WAGE FUND THEORY. 25 1 

wages, or the remuneration of their services. So far as, by 
their energy in work, their economy in the use- of materials, 
or their care in dealing with the finished product, the value of 
that product is increased, that increase goes to them by purely 
natural laws, provided only competition be full and free 
Every invention in mechanics, every discovery in the chemi- 
cal art, no matter by whom made, inures directly and imme^ 
diately to their benefit, except so far as a limited monopoly 
may be created by law, for the encouragement of invention 
and discovery. 

Unless by their own neglect of their own interests, or\ 
through inequitable laws, or social customs having the force 
of law, no other party can enter to make any claim on the 
product of industry,* nor can any one of the three parties 
already indicated carry away any thing in excess of its nory 
mal share, as hereinbefore defined. 

327. The English Doctrine of Wages.— The view here 
taken of the Distribution of Wealth, under the entrepreneur 
organization of industry, differs widely from that held by the 
English economists, except as respects the single share of the 
landowner — Rent. According to those writers, the capitalist- 
employer is the residual claimant upon the product of indus- 
try. DeQuincey summed up the Ricardian doctrine in saying : 
"Profits are the leavings of Wages."f From the entire 



we recognize the fact, the better it will be for all the world, except, per- 
haps, the few writers who are too far committed to the old erroneous 
doctrines to allow of renunciation." [Preface to the Second Edition of 
his Theory of Political Economy, 1880.] 

I may remark that when, in 1874, I had occasion to trace the genesis \ 
and the literary history of the Wage Fund Theory (See North American \ 
Review, January, 1875), I did not find a single French economist infected 
by the pernicious doctrine which long held sway across the channel. 

* With the exception, still, of the State and of the speculator, whom it 
has seemed best, for clearness of view, to remove altogether from the 
present discussion, and whose shares in the distribution of the product of 
industry will be elsewhere considered. 

f " There is no other way," said Ricardo, " of keeping profits up, but 
by keeping wages down." "Profits," said Mr. McCulloch, "vary in- 



252 POLITICAL ECONOMY. 

product of the exertions and sacrifices of the industrial com- 
munity, there is cut off Rent, as determined by the Ricardian 
formula. Next the laborer's share is ascertained in accord- 
ance with the Wage Fund,* the amount possibly to be paid in 
this way being irrespective alike of the number and of the 
industrial quality of the laboring class. The rest belongs to 

I the capitalist-employer, as his own profits, so-called, consist- 
ing of two portions, one, due to the abstinence of the owner 
of capital, as such ; the other due to the present, personal 
exertions of the employer, as such. 

By this rule of distribution, no gain in the efficiency of the 
individual laborer, whether taking the direction of greater 
energy or of greater economy ; no mechanical invention, no 
chemical discovery, however much the capability of produc- 
tion may be increased thereby, can profit the laborer any 
thing, except as it first enhances the profits of the employing 

/ class, and thereby adds to the capital of the wage fund, to be 
thereafter expended in purchasing labor. 

328. In "What Sense "Wages are the Residual Share.— 
I have spoken of the laborer as the residual claimant upon 
the product of industry. That view of wages being new, even 
the phrase in which I have embodied it has been excepted to. 
Since the first edition of this treatise was published, certain 
writers have declared that there is no more reason for applying 
the term, residual, to wages than for applying it to any other 
share of the product of industry ; that each share, in turn, 
comprises all which the other shares do not include. 

versely as wages ; that is, they fall when wages rise, and rise when 
wages fall." 

: In both these statements, the word profits is used to include interest, 
as elsewhere explained. 

* A discussion of the Wage Fund Theory will be found in Part VI. 
A few years ago, I should not have presumed to pass by this point with- 
out undertaking a formal refutation of that theory which, till recently, 
had complete possession of the English Economists. The fact that, 
though now generally abandoned, it still holds its place in so many 
treatises on the shelves of our libraries, some of which are even now used 
as text-books in our Colleges, appears to require some notice to be 
taken of it. 



WAGES: THE RESIDUAL SHARE. 253 

The criticism of these writers is not just. It is competent 
to them to controvert the view of the origin and measure of 
business profits presented in the last chapter ; and, in express- 
ing their dissent therefrom, they will, of course, deny that 
wages constitute the residual share of the product. But no 
one can properly make question that, if this view of business 
profits be accepted, as correctly setting forth, in the large 
way, the facts of industry, not only is what is manifestly 
meant by the phrases, residual claimant, residual share, com- 
pletely true, but also that those phrases themselves are per- 
fectly accurate in the expression of that meaning. 

329. Upon the theory of profits which has been expounded, , j, 
the remuneration of labor, wages, is strictly the residual share 
of the product of industry, residual in this sense, that it is 
enhanced by every cause, whatever that may be, which 
increases the product of industry without giving to any one \ 
of the other three parties to production a claim to an increased \ 
remuneration, under the operation of the principles already ' 
stated ; residual in the sense that, even if any one or all of the 
other parties to production become so engaged in any given 
increase of the product as to become entitled to an enhanced 
share in its distribution, their shares still remain subject to 
determination by positive reasons, while wages receive the 
benefit of all that is left over after the other claimants are 
satisfied. 

330. The Operation of the Rule Illustrated.— Granting 
the correctness of the analysis we have offered, it is demon- 
strable that the product of industry may be increased without 
enhancing the share of all or of any o£ the other parties to 
distribution ; and, even when the other shares are enhanced, 
it is possible and even probable ;tnat, o^ the^as^ujQipJipn of 
perfect_eomp_etiMon, the increase of product resulting from 
the introduction of any new force into industry will be greater 
than the sum of the increments by which rent, interest, and 
profits shair have been enhanced. If this be so, then the 
wages class will receive a benefit from any increase of the 
product of industry corresponding to that derived by the 
residuary legatee whenever the total value of the estate con- 



254 POLITICAL ECONOMY. 

cerned is ascertained to have been, or from some unanticipated 
cause becomes, larger than was in contemplation of the tes- 
tator when the amounts of the several specific bequests were 
determined upon. 

331. Thus, to take the simplest possible case, let us say 
that the line ax 



represents the amount of the production of a given com- 
munity. Of this total, ax, let ab represent the share going to 
the land-holding class as rent ; be, the remuneration of the 
capitalist class, under the name of interest ; dx, the portion of 
the produce paid in wages ; and, by consequence, cd, the part, 
retained by the employing class as profits. Let it now be sup- 
posed that an instantaneous improvement takes place in the 
industrial quality of the laboring class, by which they become 
so much more careful and painstaking, more adroit and alert, 
more observant and dexterous, as to effect a saving in the 
materials used in each and every stage of production, with a 
resulting increase of ten per cent, in the finished product over 
what had been accomplished by more wasteful, clumsy, heed- 
less operatives. This assumption is certainly not an unreason- 
able one, as regards the extent of the possible saving to be 
effected through even a slight improvement in the industrial 
quality of a laboring population. The total product will then 
be represented by the line ay. 

Our question is, To whom will go that portion of the prod- 
uce which is represented by the dotted line xy, under the 
normal operation of economic forces? 

I answer, If our analysis of the source of business profits is 
correct, this will go to the laboring class in enhanced wages. 

332. To whom else should it go ? To the landlord class, 
in higher rents ? No, clearly not, since the materials em- 
ployed have not been increased, but the gain to production 
results from a better economy of materials, in kinds and 
amounts as before. Hence, no greater demand is made upon 



WAGES: THE RESIDUAL SHARE. 255 

the land ; hence, cultivation is not driven down to inferior 
soils; hence, rents can not be enhanced, rent representingx 
only and always the excess of produce on the better soils ! 
above that of the soils of the lowest net productiveness under 
cultivation. The line ab, therefore, remains unchanged. 

Shall the line be show any change ? Shall all or any part 
of the gain xy go to the capitalist class, as interest ? Again 
no. An improvement in the industrial quality of the labor- 
ing class does not necessarily increase the amount of tools 
and supplies required in production. On the contrary, neat, 
intelligent, careful workmen require even fewer tools than 
ignorant, slovenly, heedless workmen, to perform the same 
kind and amount of work, since in the case of the former 
there will be a smaller proportion at any time broken or 
dulled or from any cause awaiting repair. Since, then, there 
is no greater demand for capital in the case supposed, there 
can be no increase in the rate or amount of interest ; and the 
line be will, therefore, not be lengthened. 

Will the whole or any part of xy go to the employing class, 
as increased profits ? If we have correctly discovered the 
source of business profits, this will not be the case. An 
improvement in the industrial quality of a given body of work- 
men would not require an increase in the number of employ- 
ers ; hence, would not, could not, enhance the aggregate 
amount of profits. On the contrary, an improvement in the 
industrial quality of the laboring class would tend, and would 
tend strongly, to raise the standard of business ability in the 
employing class ; to drive out the more incompetent, thereby 
raising the lower limit of production in this respect, and 
thereby reducing the aggregate amount realized as profits. 

We see, therefore, that the line cd will not be increased, in 
the case supposed ; and, as we have proved the same respect- 
ing ab and be successively, the whole of xy must go to 
lengthen the line dx, representing the amount previously 
received by the laboring class as wages. 

333. We have thus far, for convenience of reasoning and 
simplicity of illustration, assumed that the economic effect of 
the improvement in the industrial quality of the body of 



256 POLITICAL ECONOMY. 

laborers in view, is confined to an increa se in the am ount of 
the finished product through a diminution in that element of 
waste which enters, more or less, into alL production of wealth. 
The same argument would hold good of an improvement in 
the industrial quality of the laboring population which should 
result in the production of^goods of equal bulk and' weight, 
but of a greater value through_a higher qual ity, a more per- 
fect finish, a nicer adaptation to the wants of the community. 
Not only is such an increase in the value of the product, which 
does not increase the a mount of ma t erials taken from the soil 
and hence has no tendency .to enhance rents, possible, but 
instances of this character fire, more than any other, represent- 
ative of the modes^j^j^du<Mcm.JM l _^j^^ of ad- 
vancing civilization. Articles are often sold for, twice, thrice 
or ten times as much as other articles, containing the same 
amount of material, simply by reason of the skill and taste 
which has enhanced their value to the consumer. In all 
such cases, the increase due to the improvement in the indus- 
trial quality of the laboring classes would, under the_^rinci- 
ples laid down, go^ entire, to the laborers themselves, granted 
only perfect competition. 

334. But such an improvement in industrial quality would 
probably be followed, sooner or later, by an actual increase 
in the amount of material employed. In this case, what 
would be the distribution of the produce ? The increase 
would no longer go entire to reinforce wages. A larger 
amount of materials being usecl, a greater demand would be 
made thereby upon the productive powers ofjthe soil ; the 
lower limit of cultivation wouM_ be_jajshed_down wards, a 
longer or a shorter. distance, to supply the increased demand ; 
and rent would be__enhanced, as in all prosperous- and pro- 
gressive countries it certainly tends to be. 

But the amount which would thus go to enhance rent — it 
might be much, it might be little — would still be limited by 
the Ricardian formula ; and all the r ema inder would be 
applied, under the princip les laid d own, to increase the 
remuneration 4jf_labpr, the portions reserved as interest and 
profits suffering no change. 



WAGES: THE RESIDUAL SHAKE. 257 

335. But suppose, again, that the improvement in the in- 
dustrial quality of the laboring class is carried to such a degree 
as to qualify them to use a higher order of tools, more com- 
plicated, more delicate, and hence more expensive ; or to 
abandon the hand-tools, heretofore employed, for costly and 
powerful machines. Here we should have an increased 
demand for capital ; and, by consequence, supply remaining, 
for the time, unchanged, interest would be enhanced. But\ 
the amount by which interest would be thus enhanced would \ 
not be the amount by which production was increased. On ' 
the contrary, the rate of interest would still be governed by 
the relation between the supply of and the demand for capi- 
tal ; and all the increase of product which was not thus taken 
would, under the principles laid down, go directly and exclu- 
sively to increase wages. 

336. We may illustrate this by supposing a workman, who 
has hitherto been using a few coarse, simple, cheap and dura- 
ble tools, in producing a low-grade article, to have qualified 
himself, by private study and practice, to use numerous, 
delicate and intricate' tools, in doing a high order of work, in 
the same branch of industry. The cost of maintaining the 
stock of tools of the former kind might have been, including 
interest, repairs and occasional replacement, five dollars, a 
year. The cost of maintaining the stock of new tools might 
be fifty dollars a year. But the increased daily value of the 
product, due to the introduction of a superior order of workx 
manship, might be a dollar, or two dollars, a day. What I T 
am insisting upon is, that,, not only, would the. individual 
workman, in the given instance, if he intelligently pursued 
his own interest, secure higherjKageg, corresponding to the 
increased value of his production, minus the added cost of the 
service (which probably no one would deny), but that what 
would be true of the individual work-man will be true of the 
working class, as a whole, so far as, by an improvement in 
their industrial character, they qualify themselves for a higher 
grade of production, higher in respect to quality or to 
amount. 

And it is to be remembered, in this connection, that what 



k- 



258 POLITICAL ECONOMY. 

ever the advantage wfeicJb 1 _JJ^.aMe^ d^mand-for tools or 
machinery may, in the immediate jnstance, give to the own- 
ers of existing capital, that advantage will steadily tend to 
decline. Thus, in . the case supposed, the .first .equipment of 
the improved laborer f-or his new work, might cost $200, 
increasing the demand for. capital -to this, extent, and thus 
raising somewhat- the sum obtained, in that community, that 
year, as interest. But the increase ofjaroduction, might, as 
we have reasonably supposed, amount to even m ore than $ 200 
annually ; so that the supply of capital, relatively to the 
demand,, might, after a- single year, be greater than before ; 
while the capability of accumulating capital during each suc- 
ceeding year would be greatly enhanced. 



CHAPTER VI. 

WAGES. — CONTINUED. 

THE CONDITIONS OF THE LABORING CLASS AS AFFECTED BY 
IMPERFECT COMPETITION. 

337* The Economic Position of The Laboring Class. — 
In Chapter V. we set forth the relation of wages to the 
other shares of the product of industry, reaching the conclu- 
sion that, notwithstanding the formal attitude of the laboring 
class in industry, as hired by the entrepreneur class and work- 
ing for stipulated wages, Ubeyiormal operation of the laws of 
exchange is to make the former, in effect, the owners of the 
entire product, subject to the requirement of paying the 
definite sums charged against that product, on the three several 
accounts of rent, interest and profits/) 

338. What Will They do With it?— This position of the 
laboring class would seem to be a not ineligible one, conceding 
that the exigencies of modern production require the mainte- 
nance of the entrepreneur class. 

We have seen what is the best the laboring class can, in 
theory, do for themselves, under the existing organization of 



CHANGE OF RESIDENCE. 259 

industry : what is the most they can claim for their services. 
Let us now inquire, what, in fact, this class do for themselves 
in this respect ; and if they fall short of realizing their full 
share of the product of industry, to what causes the failure is u 
to be attributed. 

The laboring class may do themselves an economic injury in 
either or both of two ways : first, through excessive repro- \ , 
duction, sexually, leading to over-population, involving the 
necessity of cultivating poorer and poorer soils, with the result 
of continually diminishing per capita production ; secondly, 
through a weak, spasmodic, or unintelligent competition with 2. 
the employing class. 

The consideration of the former of these causes will be 
postponed till we reach the department of Consumption. The 
latter will form the subject of the following paragraphs. 

339. Imperfect Competition — A total failure of competi- 
tion is impossible. No class will be found so stolid and inert 
as to make no exertions whatever to change a worse for a 
better condition. The impulse to buy in the cheaper and to 
sell in the dearer market will, in some measure, actuate every 
body of laborers. Yet the degree in which that motive is 
effectual will be found to vary widely as between men of 
different climes, and of different races. Compare the New 
Englander with the East Indian. The former, inquisitive, 
alert, aggressive, almost destitute of attachment to locality, 
quick to change his avocation, if a profit shall appear, and so 
gifted with mechanical insight and aptitude as to acquire the 
rudiments of any art in an astonishingly short time ; occupying 
a country where the transmission of intelligence is incessant, 
and where the transportation of passengers and freight reaches 
the maximum of ease, security and cheapness ; enjoying the 
advantage of a wide margin of living, and with no inconsider- 
able savings laid by from the liberal earnings of former years, 
is not likely to remain long ignorant of opportunities for im- 
proving his industrial conditions, whether through change of 
place or avocation, or likely long to allow such opportunities 
to remain unimproved. We get a measure of this freedom of 
individual movement in the census statistics, by which it ap- 



260 POLITICAL ECONOMY. 

pears that in 1880 nine and a half millions of the native popu- 
lation were living in States other than those of their birth. 

340. The Immobility of Labor.— On the other hand, the 
East Indian, bound in fetters of caste, of superstition, of 
ignorance and poverty, occupying a country vast portions of 
which are traversed only by bullock-paths, abides in his lot, in 
spite of wretchedness and famine, as though rooted in the 
soil itself. 

But we have not to go as far away as India, to find instances 
of a high degree of immobility in the population, in the face 
of strong and urgent reasons for migration. A century ago 
Adam Smith wrote : 

" Eighteen pence a day may be reckoned the common price 
of labor in London and its neighborhood. At a few miles' 
distance, it falls to fourteen and fifteen pence. Ten pence, 
may be reckoned its price in Edinburgh and its neighborhood. 
At a few miles' distance it falls to eight pence, the usual price 
of common labor through the greater part of the low country 
of Scotland, where it varies a good deal less than in England. 
Such a difference of prices, xchich it seems is not always suffi- 
cient to transport a man from one parish to another, would nec- 
essarily occasion so great a transportation of the most bulky 
commodities, not only from one point to another, but from one 
end of the kingdom, almost from one end of the world, to 
another, as would soon reduce them more nearly to a level." 
So great did the resistance to the flow of labor appear to his 
eye, that he declared man to be " of all sorts of luggage the 
most difficult to be transported." 

341. It might be supposed that the increase during the 
century in the facilities for transportation and for the diffu- 
sion of information would have done much to remove the 
obstructions which, in Adam Smith's day, retarded the move- 

/ ment of labor to its market ; but the force of ignorance, fear 
V and poverty is not so easily broken. Prof. Fawcett in his 
Political Economy writes : " During the winter months, an 
ordinary agricultural laborer in Yorkshire earns thirteen shil- 
lings a week ; the wages of a Wiltshire or Dorsetshire laborer, 
doing the same kind of work, and working a similar number 



CHANGE OF OCCUPATION. 261 

of hours, are only nine shillings a week. This great difference 
in wages is not counterbalanced by other considerations. 
Living is not more expensive in Yorkshire than in Dorset- 
shire, and the Dorsetshire laborer does not enjoy any particular 
advantages or privileges which are denied to the Yorkshire 
laborer." 

Instances without number might be cited, showing the 
practical immobility of the agricultural population of England 
in the past ; and in this respect, England may be taken as 
fairly representing the actual world about which the econo- 
mist reasons, being in the mean between the people of North 
America and Australia, on the one hand, and those of Asia, 
on the other. 

342. Change of Occupation.— So much for the movement 
from place to place, which is needed to meet the requirements 
of industrial competition. Of the movement from one avoca- 
tion to another, which may be required for the same end, an 
even less favorable account may be given. An American will 
find it difficult to conceive how slow and painful is the process \ 
by which an overcrowded avocation is depleted or a growing J 
industry re-enforced, in any of the States of Europe. 

In his last and greatest work Prof. Cairnes sought to reach 
a measure of the rate of this movement in England. His 
result was substantially this : that only loss by death or disa- 
bility could be relied upon to relieve the labor market in any 
branch of industry which was overdone, and that the sole 
disposable fund for supplying new laborers to new or grow- 
ing branches of industry was to be found in the body of per- 
sons each year coming of age, industrially speaking. It would 
be easy to show that the " play " thus given to the labor mar- 
ket is far within the limits of those great oscillations of 
industry which labor must meet, fully and promptly, or 
suffer because it can not meet them. Moreover, it is doubt- 
ful whether Prof. Cairnes does not overrate this disposable 
labor fund. 

So far from the members of the rising generation being 
perfectly free to move into avocations other than those of 
their parents, mill-owners are harassed by applications from 



262 POLITICAL ECONOMY. 

their hands to take children into employment on almost any 
terms. The more miserable the parents' condition, the greater 
becomes the pressure on them to crowd their children some- 
how, somewhere, into service. Once in a mill, we know how 
little chance there is of the children afterwards taking up for 
n themselves another way of life. 

In the agricultural districts of England, gangs of children 
of all ages, from sixteen down to ten or even five years, were 
formerly organized and driven from farm to farm, and from 
parish to parish, to work all day under strange overseers, and 
to sleep at night in barns, huddled together without distinc- 
tion of sex. The system of public agricultural gangs required 
an act of Parliament to break it up, and we have the testi- 
mony of the commission of 1867, that, in spite of the law, 
gangs were then still formed in some parts of the kingdom. 
So late as 1870, children were employed in the brickyards of 
England, under strange masters, at three and a half years of 
age. Account is given of a boy weighing 52 pounds, whose 
daily task covered fourteen miles ; one-half of this with a load 
of clay weighing forty pounds, upon his head. 

Such instances show graphically the error of supposing that 
parents who are tied down hopelessly to an occupation which 
affords but the barest subsistence, can freely dispose of their 
children to the best advantage, among a large class of occu- 
pations. Especially when we consider that, in the develop- 
ment of modern industry, trades become highly localized, shall 
we see the practical fallacy of this assumption. Even if we 
suppose the parent to be advised of better opportunities 
opening in some trade prosecuted at a distance, yet, years 
before the boy or girl will be fit to send away from home, the 
chance of earning a few pence in the mill where the parent 
works, will almost irresistibly draw the child into the vortex. 

\The truth is, that until you secure mobility to adult labor you 
will fail to find it in the rising generation, and that among an 
ignorant and degraded population four-fifths, perhaps nine- 
tenths, of all children, by what may be called a moral neces- 
; sity, follow the occupations of their parents, or those with 
whom fortune has placed them. 



THE ECONOMIC HARMONIES. 263 

343. The Industrial Effects of a Failure of Competition.— 
If industrial movement may be thus tardy and limited, even 
among a people of Teutonic blood and enjoying free institu- 
tions, it becomes a matter of serious concern to inquire what 
are the effects of a partial failure of competition. 

And, first, let us see just what it is that we look to competi- 
tion, when active and complete, to accomplish. 

We have defined competition to be the operation of indi-) 
vidual self-interest among buyers and sellers. We saw that 
this implied that each man acts for himself, solely, by himself N 
solely, in order to get the most he can from others, and to 
give the least he must, himself. 

Now, this may seem a very unamiable thing yet, rightly 
viewed, perfect competition would be seen to be the order of 
the economic universe, as truly as gravity is the order of the 
physical universe, and to be not less harmonious and bene- 
ficent in operation. If free and full, unqualified, unremitting 
competition could be secured, the results would be more 
honorable to human nature, as well as practically more 
advantageous, in the same degree, and for the same reason 
that absolute justice would be more advantageous and more 
honorable than partial justice patched up with charity. 

344. The Economic Harmonies. — When we say that % 
through competition one reaches his best market, does this 
mean that in that way he does best for himself alone ? On 
the contrary, when one reaches his best market, he does not 
only that which is best for himself, but that which is best for 
others. He not only gets more than by resorting to any 
other market, but, in the very act of doing so, he gives more, 
also. If in that market his service or commodity bears a 
higher price than elsewhere, this is of itself a proof that his 
service or commodity is there in greater demand, more needed, 
the subject of an intenser want, than elsewhere. Con- 
sequently, were he to resort elsewhere, he would not only 
receive less himself, but would satisfy a lower want on the 
part of others, leaving a higher want unsatisfied. 

345.— But the main office of competition is to preserve indi- 
viduals and classes from destruction or industrial degradation, 



264 POLITICAL ECONOMY. 

through excessive burdens imposed by authority, through 
natural catastrophes affecting the sources of livelihood, or 
through the gradual decay of commercial demand. Deal the 
heaviest blow you can with a hammer into a bin of barley, 
and you will not injure a single grain, though the hammer be 
buried to your hand, because every grain moves freely from 
its place, and the mass simply opens to receive the intruding 
substance and closes around and above it. Lay one of the 
grains upon a rock, and your blow will smash it into a paste. 
Let the stoutest ship that ever rode out a hundred gales have 
her bow lodged in the sands, and the oncoming waves of the 
first storm will break her up in a few hours. 

In the nature of the case, blows must fall, from time to 
time, upon every industrial community or class. Whether 
these be due to wars or failures of the harvest, or to confla- 
grations and floods, or to the shifting of commercial demand, 
or to vicious legislation, labor has an ample security against 
deep and permanent injury, so long as its mobility is unim- 
paired. On whatever spot the blow may fall, complete free- 
dom of movement, from place to place and from avocation to 
avocation, will cause the original loss to be distributed over 
the industrial body, while the forces of repair and restoration 
will immediately set to work to make good what has been 
taken away. 

346. To Him That Hath Shall be Given.— This tendency 
to the diffusion of all benefits to the equalization of all bur- 
dens, and to the repair of all local injuries at the expense of 
the vital powers of the whole industrial body, is properly the 
subject of admiring contemplation by social and ethical phi- 
losophers. Frederic Bastiat has, in words of deathless elo- 
quence, described this play of industrial forces, under the 
title of The Economic Harmonies. 

But the political economist who undertakes the explanation 
of the actual phenomena of the industrial world, is bound to 
note, not only that the assumption of full and free competi- 
tion, which underlies this theory of the self -protecting power 
of labor, is wholly gratuitous, as applied to vast portions of 
the earth's population ; but, also, that, when the mobility of 



TO HIM THA T HA TH. 265 

labor becomes in a high degree impaired, the reparative and 
restorative forces do not act at all. On the contrary, a new 
and antagonistic principle begins to operate, viz., the princi- 
ple that " To him that hath shall b e given, and from him that 
hath not shall be taken away eve n the little that he seemeth 
to have." 

Under the rule of this great economic as well as social law, 
industrial injuries once suffered tend to remain, and not to be 
removed. The wretch who has fallen is trampled on in the 
maddening struggle for place and pelf. In the case of the 
laborer thrown out of employment, for instance, there is 
always danger that self-respect, hopefulness and ambition, 
which we have seen (par. 76) to be most powerful factors in 
industrial efficiency, may fail among squalid surroundings. A 
less ample or nourishing diet, and less healthful conditions, 
submitted to for awhile, perhaps the contracting of dis- 
tinctly bad habits through anxiety, disappointment and en- 
forced idleness, may so lower his industrial power as to unfit 
him to render the same amount and quality of service as^ 
before. In such a case, not only is there no tendency in any 
economic force to repair the mischief that has been done, but 
even the occurrence of better times and new opportunities 
would not restore the shattered industrial manhood. 

347. Economic Injuries Tend to Remain and to Deepen. 
— Irrespective of any thing catastrophic, the tendency of purely 
economic forces, under impaired competition, is continually 
to aggravate the disadvantages from which any person or 
class may suffer in the beginning. Defeat is an ill prepara- 
tive for fresh conflicts. Every gain which one makes at the 
expense of another furnishes the sinews of war for further 
aggression ; every loss suffered diminishes the capabilities of 
further resistance. 

This principle applies with increasing force as we go down- 
ward in the industrial scale. Emphatically is it true, that the 
curse of the poor is their poverty. Cheated in quantity, qual- 
ity and price, in whatever they purchase, they are unable to 
get even as much proportionally for their little as the rich for 
their larger means. The tendency of purely economic forces, 



266 POLITICAL ECONOMY. 

therefore, is to widen the differences existing in the constitu- 
tion of industrial society, and to subject every person or class, 
who may, from any cause, be put at disadvantage, to a con- 
stantly increasing burden. 

348. "What may help the Laboring Class in Competition 
for the Product of Industry.— Granting that perfect compe- 
tition would do all that has been claimed for the working 
classes, realizing the very ideal conditions under which they 
should work, but, at the same time, recognizing the fact that, 
in industrial society as now constituted, competition is very 
partial and incomplete, let us inquire what, if any thing, can 
be done to help the laboring classes in their competition for 
the product of industry. 

The answer of the economists of the laissez faire, or Man- 
chester school to this inquiry is a very easy one. Freedom 
being the ideal condition, and society suffering from lack of 
it, let us have all the freedom we can get, at this time, and 
thus prepare the way for more of it in the time to come. Let 
us abolish every thing in the way of restraint or regulation, 
every thing in the way of concert or combination in industry, 
which we can abolish, and trust to the future for doing away 
with those obstructions which are now beyond our reach. 

349. Economics and Politics.— This answer is so easy as 
not unfairly to arouse some suspicion. Do we deal in this 
spirit with the question of progressive freedom in govern- 
ment ? Does any right-thinking man, with his eyes open 
upon the experience of the last hundred years, allege that 
progress is best to be effected by indiscriminately throwing 
off restraints ? Is it not admitted that discretion and order 
must be observed in removing political checks and balances 
and limitations ? Are there not, in any well-organized society, 
restrictions which correspond to certain human infirmities, of 
which we can not now hope to rid the race, in such a way that 
the existence of the restrictions increases the actual degree of 
freedom* enjoyed by the community ? 

* " The modern English citizen, who lives under the burden of the 
revised edition of the statutes, not to speak of innumerable municipal, 
railroad, sanitary and other by-laws, is, after all, an infinitely freer, as 



FREEDOM VS. RESTRAINT. 267 

350. The Burning Theater.— But if any reader distrusts an 
analogy drawn between economics and politics, let us take a 
case from real life, where all the elements can be easily and 
confidently grasped. Suppose a crowded audience to be seek- 
ing to escape from a theater which has taken fire. There 
might be time to allow the safe discharge of all in the house. 
If so, the individual interest of each person clearly would 
coincide with the interest of the audience viewed collectively, 
namely, that he should fall in precisely according to his posi- 
tion relative to the common place of exit, and should move 
just so fast and no faster, according to the rate of discharge 
from the building into the outer air. Yet, human nature 
being what it is, we know that there would be great danger 
of a furious rush for the door, which would lead to the serious 
retardation of the movement of the audience as a whole, and 
probably to many persons being trampled upon or burned. 

Suppose, now, that, at the moment of alarm, a score of reso- 
lute policemen were to present themselves, what could they 
do ? Clearly they could not cause the audience to be dis- 
charged more quickly, safely and harmoniously than would 
be the case did every person in the audience truly comprehend 
the situation and act coolly with reference to his own inter- 
est, as above stated. As compared, however, not with what 
the audience ought to do, but what they probably would do, 
the advent of the policemen would save many limbs and lives, 
perhaps avert a calamity that would have filled the world 
with horror. With discipline thus imposed upon men in 
such a situation, the procedure which would be for the inter- 
est of each and of all might go forward swiftly, surely 
and steadily, under authoritative direction. Discipline can, 
indeed, create no force, but it may save much waste. 

351. Registration of Land. — But if any one is still dis- 
posed to distrust analogies drawn between things inside and 
things outside the sphere of economics, let us take the case of 
a regulation prescribing the registration of real estate and the 

•well as nobler, creature, than the savage who is always under the despot, 
ism of physical want." Jevons — " The State in Relation to Labor." 



268 POLITICAL ECONOMY. 

recording of all transfers and mortgages of land. Such a 
regulation would be restrictive upon transfers. Transfers 
would require to be made in writing and after a definite form ; 
certain words must be used to make the instrument effective ; 
a certain delay must be submitted to ; an office, perhaps at a 
distance, must be visited ; copies must be made ; a fee given. 
Yet who does not know that a regulation of this character, 
though in name restrictive, would in fact not retard but 
immensely" promote the transfer of real estate. For uncer- 
tainty it would substitute the highest assurance ; for the risk 
of losing the whole principal, it would offer a clear and inde- 
feasible title, which would repay, many times over, the petty 
fee and the trouble required. The slow and costly transfer 
of real estate in England, where no such system exists, in com- 
parison with the cheap and easy transfer of the same species 
of property in the United States, affords a measure of the 
force of this cause. 

352. Always a Practical Question. — Perhaps enough has 
been said to show that the question whether a certain act, 
ordinance or social arrangement retards or promotes the move- 
ment of labor to its market, is a practical question, not to be 
determined d priori, except in the case of extreme measures, 
but to be considered and decided with reference to the existing 
condition of industrial society and to the actual infirmities or 
liabilities of the laboring population to which it was intended 
to apply.* A crutch operates only by restraint, and to a man 
of sound limbs can be only a hindrance ; but it is a restraint 
which corresponds to the infirmity of a cripple, and may be 
the only means of enabling him to walk, or even of keeping 
him from falling hopelessly to the ground. 

In application of these remarks, a brief discussion of the 
influence of Trades Unions and Strikes upon wages and upon 
the condition of the laboring class, will be found in Part VI. 

353. Wages and Public Opinion. — When the writer first 

* " The outcome of the inquiry is that we can lay down no hard and 
fast rules, but must treat every case, in detail, upon its merits. Specific 
experience is our best guide, or even express experiment where possible." 
Jevons — " The State in Relation to Labor." 



PUBLIC OPINION. 269 

ventured, in 1874, to urge that respect for labor and sym- 
pathy with the laboring class might become a force in determ- 
ining the market rate of wages, he Avas greeted with derision. 
He has reason to believe that in the intervening years the 
arguments then presented have worked their way toward a 
conviction of the public mind that the cause thus adduced is 
not an unreality, but one which actually operates with per- 
ceptible force within the field of economics. 

Let it be observed that what is claimed is, not that com- 
passion and sympathy will induce employers here and there to 
pay wages above the market rate, but that these sentiments 
may become a force in determining what the market rate 
shall be. 

354. An Analogous Case. — And, in the first place, why 
this incredulity on the first suggestion of the subject ? Is it 
not true that sentiments of personal kindness and of mutual 
respect between classes of the community have had a very 
important influence, in many countries (see pars. 266-76), in 
determining the rates at which land should be leased ? If 
public opinion may be a very powerful, often a predominant, 
force in determining the rent of land, why should we not 
expect that it would have at least an appreciable force in 
determining wages ? 

355. The Reason of the Case. — But let us leave analogy, 
and turn to the reason of the individual case. How can the 
sentiments we have invoked become an economic force, and 
thus enter into the distribution of wealth between employer 
and employed ? 

Let us recall the principle, so often insisted on, that it is 
only as competition is perfect that the wages class have any 
security that they will receive the highest remuneration which 
the existing conditions of industry will permit. In the failure 
of competition, they may be pushed down, grade by grade, in 
the industrial as in the social scale. Let us recall, moreover, 
that the failure of competition may be due to moral as much 
as to physical causes ; that if the workman from any cause 
does not pursue his interest, he loses his interest, whether he 
refrain from bodily fear, from poverty, from ignorance, from 



270 POLITICAL ECONOMY. 

timidity and dread of censure, or from the effects of bad 
political economy, which assures him that if he does not seek 
his interest his interest will seek him. 

Now I ask, can it be doubtful that the respect and sympathy 
of the community must strengthen the wages class in this 
unceasing struggle ; must give weight and force to all their 
reasonable demands ; must make them more resolute and 
patient in resisting encroachment ; must add to the confidence 
with which each individual laborer will rely on the good faith 
of those who are joined with him in his cause, and make it 
harder for any weak or doubtful comrade to succumb ? 

And, on the other hand, will not the consciousness that the 
whole community sympathize with the efforts of labor to 
advance its condition, by all fair means, inevitably weaken 
the resistance of the employing class * to claims which can be 
conceded, diminish the confidence with which each employer 
looks to his fellows to hold out to the end, and make it easier 
for the less resolute to retire from the contest, and grant, 
amid general applause, what has been demanded ? 

356. The Lamentable Case of Hodge.— Let us apply these 
principles to an individual case. Hodge thinks — Hodge is a 
plowman, and has been getting twelve shillings a week — 
that he ought to have more wages, or, rather, for Hodge 
would scarcely put it so abruptly, he feels that it is dreadfully 
hard to live on twelve shillings. He has attended a lecture 
delivered by Mr. Joseph Arch from a wagon on the green. 
He is uneasy and wants to improve his condition. So far, 
then, he is a hopeful subject, economically. The desire to 
improve one's condition is the sine qua non of competition. 
Will these stirrings of industrial ambition come to any thing ? 
Will the discontented plowman seek and find his better 
market ? f This is a great question, for upon the answer to it 

* "Masters are always and everywhere in a sort of tacit, but constant 
and uniform, combination not to raise the wages of labor above their 
actual rate." — Adam Smith : " Wealth of Nations." 

f In discussing his valuable agricultural statistics before the London 
Statistical Society, Mr. Fred. Purdy said : "It would appear that no 
commodity in this country presents so great a variation in price, at one 



PUBLIC OPINION. 271 

depends the future of Hodge, and perhaps of his sons and 
grandsons. Let the Spectator (August 4, 1872), tell how he 
is assisted on his way and encouraged in his weak, ignorant, 
doubting mind, by landlord, bishop, and judge. 

" The man has been, so to speak, morally whipped for six 
months. He has found no friend anywhere, except in a press 
he can neither read nor understand. The duke has deprived 
him of his allotment ; the bishop has recommended that his 
instructor should be ducked ; the squire has threatened him 
with dismissal in winter ; the magistrate has fined him for 
quitting work, which is just, and scolded him for listening to 
lectures, which is tyranny ; the mayor at Evesham has pro- 
hibited him from meeting on the green ; and the lawyer — 
witness a recent case near Chelmsford — has told him that any 
one who advises and helps him to emigrate is a hopeless 
rascal." 

Now I ask, in all seriousness, is Hodge quite as likely to 
pursue his interest and persist in whatever that requires — 
— which, be it observed, is no other than what the interest of 
the whole community requires — as if his social superiors were 
encouraging him to better his fortune if he finds a chance ; 
as if the shopkeeper and the publican and the lawyer and the 
rector and the squire were not all ranged against him ? Is it 
not possible that, for the lack of a little fanning, the feeble 
flame in Hodge's breast may die out, and he, giving up all 
thought of seeking his fortune elsewhere, return to his fur- 
row, never to stray from it again ? 

time, as agricultural labor, taking the money wages of the men as the best 
exponent of its value. A laborer's wages in Dorset or Devon are barely 
half the sum given for similar services in the northern parts of England." 
Among the causes of this Mr. Purdy cites "the natural vis inertia of 
the class." 



272 POLITICAL ECONOMY. 

CHAPTER VII. 

TWO OTHER SHARES IN DISTRIBUTION. 

867. We have discussed the distribution of the product, 
under the entrepreneur organization of industry. We have 
seen that this product is divided into four principal shares, 
rent, interest, profits and wages, corresponding to four classes 
of claimants. We have now to inquire what becomes of cer- 
tain portions of the product, which do not appear to go into 
either of the four shares enumerated. And first of the amount 
taken by government. 

358. Taxation.— There has long been a difference of opin- 
ion among economists, whether taxation should be a title in 
distribution or in consumption. Prof. Senior held to the lat : 
ter treatment ; Prof. Jevons favored the former. 

The difference is just this : Shall we regard government as 
a fifth original claimant upon the product of industry, taking 
its share under the name of taxes, as the land-owner takes 
rent, the capitalist interest, the employer profits, and the 
laborer wages ; or shall we regard the product as divided into 
four shares, out of each of which is paid, as one form of the 
owner's consumption of his income, a sum, greater or less, for 
the sustentation of government, just as out of each such 
share are paid sums, greater or less, for shelter, food, fuel, 
etc.? 

The question is not a very important one in a general 
treatise on Political Economy, and neither decision solves 
all the difficulties of the case, since the functions of govern- 
ment are so various and so widely diverse. 

On the one hand, it is said that government is a great pro- 
ducer and should be regarded as a claimant in distribution, 
taking its share under the name of taxes. Government builds 
and keeps in repair roads and bridges and breakwaters and 
perhaps, also, canals and railways, for the purposes of trade 
and industry. Government maintains a constabulary and 
court-houses and jails, that the honest and industrious may 
work without hindrance or even fear of molestation. Govern» 



TAXATION. 273 

ment does a great many other things which minister directly 
to the creation of values, vastly increasing the amount of the 
product over what it would have been without the interven- 
tion of this agency. 

On the other hand, it is said that a great part of what gov- 
ernment does has not the production of wealth as its primary 
object, and that much does not even contribute indirectly to 
that end, as in the case of the vast military and naval expen- 
ditures of the nations of Europe, which have for their pur- 
pose, not the preservation of civil peace, but to maintain the 
existence or extend the power of nationalities or of dynas- 
ties. Secondly, whatever the objects of expenditure, govern- 
ment does not obtain its revenue through the agencies of 
exchange, but by forcible collection, men contributing, not 
because government has made it worth their while to do so, 
not because government is prepared to render an equivalent, 
but simply because government demands the contribution and 
will have it. For these reasons, it is urged, the revenue of 
the State should not be treated as a share in disti-ibution, but 
as a form of consumption. 

359. As has been said, the question is not free from diffi- 
culties whatever course be taken. A thoroughly consistent 
treatment of the subject of taxation would require the appear- 
ance of this title in more than one department of political 
economy. 

(«.) The function of government in the creation of values 
is extensive and important, under the modern organization of 
industrial society. The building and maintenance of roads 
and bridges, of breakwaters and lighthouses, the opening of 
harbors, and the improvement of rivers, all directed towards 
a larger production of wealth, form a notable part of the 
industrial agencies of all progressive communities. These 
things, if done on the initiative and at the expense of indi- 
viduals, who looked to tolls, fees, and dues for their reimburse- 
ment, would be by all deemed productive, in the fullest sense. 
They are not less so when done by government, with funds 
raised by taxation. 

(b.) The methods of taxation, the subjects of imposition, 



274 POLITICAL ECONOMY. 

the agencies of collection, so far as they affect the ultimate 
incidence of taxation, that is, so far as they determine that 
the pressure of taxation shall finally rest here and not there, 
on this class and not on that, fall within the department of 
Distribution. The questions, e. g., whether a tax on wages 
results in a reduction of the comforts, luxuries, and necessa- 
ries enjoyed by the laborer, or is, in the end, paid by the 
employer ; whether a tax on rent rests upon the landlord, or is 
by him shifted upon the consumer of agricultural produce : 
these and the like are questions in Distribution. 

(c.) The effects of the expenditure by government of a cer- 
tain amount of wealth, as contrasted with the effects of the 
expenditure of the same amount by the classes who paid the 
taxes that put the treasury in funds, belong to the depart- 
ment of Consumption. 

(d.) The questions, how the largest amount of revenue can 
be secured with the smallest cost of collection ; how the 
needed revenue can be procured with the least irritation of the 
public mind ; how the highest assurance can be obtained as to 
the proper custody and disbursement of funds ; these and the 
like are questions in fiscal or " Cameralistic " science, and not 
in economics strictly considered. 

(e.) In addition to the question (b), what is the ultimate 
incidence of any existing or projected body of taxes : who, in 
in the last resort pays them ; whose sum of enjoyment is 
actually diminished by the imposition, we have a question, to 
which writers on taxation devote a large part of their space, 
viz., who ought to pay the taxes of any given community : 
what classes should contribute to the support of the govern- 
ment, and in what proportions ? This is purely a question in 
political equity. 

360. The foregoing would be the true logical treatment of 
taxation. In an elementary treatise, however, I do not deem 
it worth while to deal so elaborately with this subject, and 
will postpone to Part VI. whatever I have to say regarding 
taxation, except so far as it may be desirable to speak of 
the influence of government expenditures when we reach the 
department of Consumption. 



SPECULATION. *75 

361. The Speculating Class.— Incidental to all the pro- 
cesses of production and exchange is the chance of gain oJ 
loss through the rise or fall of prices during the interval 
between buying and selling ; between making and selling. 
This gain or loss may be slight, in any given case, or it may 
be considerable. There were many manufacturers in the 
United States who made fifty or a hundred thousand dollars, 
clear, by the rise of cotton, on their hands, in 1861 and 1862, 
and this without intentionally speculating at all, but simply 
through holding a large stock for the purposes of legitimate 
manufacturing. At other times, the daily, weekly, monthly 
fluctuations of prices will be very slight, now all on one side, for 
a long time ; now, all on the other side ; then, oscillating back- 
wards and forwards across what we may call the average price. 

To a certain extent, these fluctuations of price may be 
trusted in time to offset each other, as regards any individual 
merchant or manufacturer. Yet after all the effect of this 
is exhausted, there will still be a chance of gain or of loss, 
which may be so considerable as to become an important 
element in determining the fact of profits, or even in deciding 
the solvency of the merchant or manufacturer, in spite of the 
strictest observance of the rules of prudence, and in spite of 
the greatest energy and industry. 

Within this field, so far as the great body of business men 
are concerned, fortune holds undisputed sway. They lack 
the faculty to discern the signs of the future. They do the 
best they can to produce good articles cheap, to meet the 
demands of the public as to fashions and styles, to keep 
expenses down, and to avoid losses by bad debts. When they 
have done this, they have done all they can for themselves ; 
and whatever gains or losses come to them through the fluctu- 
ations of the market, come as if wholly by chance. There 
are other men who have a rare power to apprehend in advance 
the movements of the market. It is always found that when 
materials begin to rise, these men have a large stock on hand. 
Let a disastrous fall occur, these men are never caught by it. 
Whichever way the market turns, it seems as though the sole 
object were to enrich these fortunate beings. 



276 POLITICAL ECOAOMY. 

Of course, this is speculation ; yet when it is carried on only 
incidentally to a legitimate manufacturing or trading business, 
we do not call these men speculators. 

362.— In every progressive commercial community, however, 
is found a large and increasing number of persons who, either 
possessing this faculty of discerning the signs of the market, 
or flattering themselves they possess it, make a business of 
buying or selling according to their anticipations of a rise or 
a fall. These persons are not manufacturers ; they are not 
merchants, in any proper sense ; they do not buy from pro- 
ducers or sell to consumers ; they are neither importers, job- 
bers, wholesalers or retailers ; they have perhaps no stores or 
warehouses or stocks of goods ; possibly, would not know by 
sight a sample of the commodities they deal in. They simply 
bet upon the market, having a well or ill-founded opinion of 
their own shrewdness and coolness in doing so. They may 
jose a fortune, or make a fortune. 

The difference between the two kinds of speculation may 
be illustrated as follows : A miller who grinds two hundred 
thousand bushels of grain a year, may, if he have this pecu- 
liar kind of insight, by carefully watching the market, buy 
his wheat at two cents a bushel less than he would have had to 
pay for it had he bought it from time to time as he needed it 
for grinding. This is speculating. Moreover, after grinding, 
he may hold the flour weeks, or months, until he sees his chance, 
and then, by going into the market at the right moment, he 
may sell it at ten cents a barrel more than if he had sold it as 
it was made. This again is speculating. Now here is a 
saving in materials of $4,000, and a gain on the price of the 
product of, say, $4,000. After making allowance for interest 
on the extra capital required to " carry " the wheat and the 
flour, and for the cost of storage, the addition made hereby to 
the miller's profits for the year would be a tidy sum. On the 
other hand, a corn-broker may buy and sell twenty thousand 
bushels a week, buying and selling on all sorts of time, ten 
days, twenty days, sixty days, six months, every transaction 
being a bet upon the price of corn at a future date. When 
the broker buys, he bets that the price will rise ; when he sells, 



SPECULA TION. 277 

he bets that it will fall. The men from whom he buys have 
as little corn as he has ; the men to whom he sells would know 
as little as he what to do with actual corn, were any of it to 
come in their way. 

Of speculating as a business, two things may be said. 
First, it is surprising what an enormous aggregate of trans- 
actions a man of little capital and no brains to speak of, may 
conduct in the course of his life, and yet neither lose nor gain 
much if only he confines himself to small individual opera- 
tions. Secondly, not less surprising are the gains of specula- 
tion when conducted by a real master. Every year an appre- 
ciable portion of the product of industry passes into the 
possession of the men of this class. In every highly commer- 
cial country, the largest fortunes are those made by specula- 
tion. The fortunes so made, however, are not nearly so 
numerous as those made by trade and industry. 

363. Speculation is not wholly without its advantages to 
the community. If corn is likely to be scarce and, by con- 
sequence, high, four months hence, the man who now begins 
to buy does, in so far, call attention to that probability. 
By raising the price he, so to speak, advertises for an 
increased supply to be brought in from the outside, and for 
greater carefulness in husbanding the existing stock. If 
beef is likely to fall in price, sixty days hence, the man who 
now sells does what lies in bim to give notice of an excess 
of supply, and thus affords duller-witted holders opportunity 
to get rid gradually of their stock, instead of encountering 
an utter breaking down of the market a little later. In a 
word, speculation while confined within moderate limits is 
the agent for equalizing supply and demand and rendering 
the fluctuations of price less sudden and abrupt than they 
would otherwise be. 

There are causes, howes er, which go to render speculation 
extravagant, carrying it beyond all reasonable bounds, multi- 
plying the numbers of the speculating class and vastly 
increasing their gains, at the expense of the sober, productive 
industries of a country. Foremost among these is a vicious 
money system. The extent to which this cause engenders 



278 POLITICAL ECONOMY. 

speculation may be seen in the history of the " Continental " 
money of the American revolution, of the " Assignats " of the 
French revolutionary period, and of the " Greenbacks " of 
the war of Secession. With prices fluctuating violently and 
rapidly, the opportunities for acquiring large wealth by spec- 
ulation are increased ten-fold, it may be a hundred-fold. 
This is too much for human nature : too much for honesty, too 
much for prudence. A subtle poison runs through the veins 
of the community, turning the heart to crime and the brain to 
folly. The face of society changes, under such an evil pas- 
sion, as suddenly and as fearfully as does the face of a man 
stricken with a deadly fever. On every hand breaches of 
trust testify to the weakness of the principles of virtue under 
such a strain, while honest and discreet modes of obtaining a 
livelihood are disparaged and abandoned for those which 
promise quicker and larger, even if illicit, gains. 

364. Loaded Dice. — Of much speculation, it must be said 
that it is wholly beyond economic as well as moral sympathy. 
If all speculation is gambling, this is gambling with the dice 
loaded. By means of combinations and corners, the markets 
are often profoundly influenced in order to produce the very 
fluctuations on which the grain or petroleum or stock gam- 
blers have made their bets. The mischiefs suffered by trade 
and industry, originating in this source, are monstrous, even 
incalculable. Whether they can in any degree be repressed 
by law, is a grave political question, with which we are not 
called to deal. 



CHAPTER VIII. 

THE REACTION OP DISTRIBUTION UPON PRODUCTION. 

365. Actual Production Compared with. Productive 
Capability. — In a previous chapter (Chapter IV., Part 2), we 
considered the elements which enter into the productive capabil- 
ity of a community, and indicated, as the one most important 
question with which political economy has to deal, the 



PRODUCTIVE CAPABILITY. 279 

inquiry, why it is that the actual production of any 
community falls so far short of what its land power, its 
labor power, and its capital power are jointly competent to 
effect. 

It was there stated that only when we should have passed 
through all the departments of political economy should we be 
in a position fully to answer this question. 

366. Even under the title, Production, however, we saw 
that grave liability to loss of force inheres in the industrial 
structure of society especially under the entrepreneur system, 
by which the labor power and the capital power of the com- 
munity become committed to numerous highly technical em- 
ployments, from which they can not readily release themselves, 
and, within those employments, become subjected to the 
direction of a comparatively small number of individuals, 
whose peculiarities of character, of habit, of station, seriously 
modify the application of capital and labor to production ; 
whose mistaken aims, whose erroneous impulses, may divert 
these forces from that object ; whose accidents of fortune 
may impair the energy of the industrial movement or paralyze 
it altogether. 

Again, under the title, Exchange, we saw (Chapter VII., 
Part 3) that still further and even more grave liabilities to 
lossof industrial force inhere in that commercial system which, 
by separating producer and consumer, often by wide inter- 
vals, sometimes by half the circumference of the globe, intro- 
duces the opportunity for serious misunderstandings between 
these two classes ; misunderstandings which, when intensified 
by panic, may at times result in a wide and long-continued 
suspension of productive activity. 

367. We are now to inquire respecting the reaction of Dis- 
tribution upon Production. Is here a liability to a still fur- 
ther loss of productive force? Discarding the terms just and 
unjust, or equitable and inequitable, as applied to the distribu- 
tion of wealth, let us ask whether there is found, in a division 
of the product of industry according to certain proportions, be- 
tween the several parties who have united in production, a suf- 
ficient cause for a smaller production of wealth in the future 



280 POLITICAL ECONOMY. 

than would result from a division of the same product between 
the same parties in different proportions ? 

I think we have at various points, in our treatment of dis- 
tribution, caught views of the subject which must have satis- 
fied us that it is possible that the product of industry, in any- 
given time and place, may be so divided among the persons 
and classes of persons who have contributed to its production, 
as to impair, in greater or less measure, the productive force 
up to that time existing ; perhaps, even, to generate influences 
which shall thereafter act with increasing violence in reducing 
the productive capability of the community. It may be well, 
however, to stop a moment at this point and to treat distinctly 
and separately the j30ssible reaction of distribution upon 
production. 

368. The Landlord and the Capitalist have an Economic 
Advantage. — The consideration nearest at hand, in this con- 
nection, would seem to be this, viz. : that among the four 
several main classes of producers, there are wide differences 
as to the liability, to which these are respectively subject, of 
being so cut down in their remuneration, in any given time 
and place, as to suffer a loss of force thereby. Two of the 
four classes, viz. : landlords and capitalists, clearly occupy a 
position of what may be called economic advantage. They 
have at their command certain material agencies of production 
by withholding the use of which they can inflict a relatively 
greater injury upon others than they would themselves suffer. 
In the expressive phrase of children, they have their hands on 
" the upper end of the stick." They are in a position to make 
bargains for themselves to the best advantage. 

It is true that, unless the landlord find a tenant, he can 
have no rent. Yet a landlord who has five farms to let, may 
put a great pressure upon each and every one of six would-be 
tenants. Moreover, the landlord is, in general, much more 
wealthy than his tenant, and is thus able to stand longer out 
of his remuneration, in case there comes to be a contest 
between the two as to the terms on which the land shall be 
rented. I might add that, if a given farm be not rented at 
all, for a season, it may not be altogether a loss to the owner. 



ON UNEQUAL TERMS. 28 1 

The orchard will bring forth its crop of fruit without the 
intervention of a tenant ; the grass will grow as thick and 
hio-h as usual, on the " mowing " ; the wood lots will all the 
time he acquiring value ; the arable lands will have a rest 
which it might possibly have been good policy to give them, 
even at the sacrifice of rent. 

Again it is true that, unless the capitalist lends his accu- 
mulations, he can not acquire interest ; yet his loss by standing 
out of his interest, for a given season, may be far less than 
that sustained by the entrepreneur through losing the use of 
the capital on which he had relied. The latter person may 
have become so engaged that the failure to effect a loan, 
while it cost the capitalist but one and a half per cent, dur- 
ing three months, might require the entrepreneur to sell goods 
at a great sacrifice, or to give up some contract which prom- 
ised to be highly advantageous. 

Enough, perhaps, has been said to justify the assertion that 
the capitalist and landlord occupy positions of economic 
advantage, so far, at least, that they are not likely to suffer 
injury, except by violence or legal spoliation. 

It is another question, whether the economic advantage 
enjoyed by these two classes is so great as to place it in their 
power to do an injury to other classes, that is, to cut down 
the shares going to those other classes, out of the product of 
industry, to such an extent as to impair their productive 
force, and, by so doing, to diminish the productive capability 
of the community. 

369. Shall the Capitalist be Hampered ?— In remarks on 
Usury Laws, which will be found in Part VI., I shall express 
the opinion that, in certain states of industrial society, the 
lending class have so great an advantage over the borrowing 
class, which, in such states of society, consists generally of 
distressed persons, as practically to place an individual bor- 
rower completely at the mercy of the usurer, who is able to 
exact a rate of interest which is not only irrespective of the 
economic service rendered through the loan, but soon 
becomes destructive of the borrower's credit, and financial 
integrity, reducing him speedily and certainly to bankruptcy 



282 POLITICAL ECONOMY. 

and perhaps to prison. Under conditions like these, I shall 
suggest that laws limiting the rate of interest, in protection of 
the would-be borrower, may not be as unwise and as unstates- 
manlike as they have generally been considered. On the 
other hand, I shall undertake to show, that in advanced 
stages of industrial society, where commerce and manufac- 
tures are widely extended and are largely carried on by means 
of borrowed capital ; where, therefore, borrowers are no 
longer distressed persons ; but the most active and prosper- 
ous members of the community borrow largely, freely and of 
choice, as a matter of business and with a view to profit — in 
such stages of society laws limiting the rate of interest merely 
lay an extra bui'den upon those who are at a peculiar diffi- 
culty in borrowing. In the absence of such laws, those per- 
sons will benefit by the greater plentifulness of capital, the 
greater ease of borrowing and the consequently lower rate of 
interest, which, in general, result from freedom regarding con- 
tracts for loan, in a commercial or manufacturing community. 
The business classes, active, alert, aggressive in competition, 
will make rates of interest by which the less fortunate mem- 
bers of society will profit. 

370. Shall the Landlord be Restrained ? — In the chapter 
on rent, the opinion has been expressed that, in a community 
like the United States, or Canada, or Australia, the landlord 
may make the utmost out of his economic position without 
working industrial injury to the tenant, owing to the mobility 
of the population, their readiness and resourcefulness, their 
self-reliance and economic aggressiveness. In countries occu- 
pied by populations of a lower industrial character, we saw 
that, unless the constraints of law * or public opinion inter- 

*" The land of a country presents conditions which separate it econom- 
ically from the great mass of the other objects of wealth — conditions 
which, if they do not absolutely and under all circumstances impose 
upon the state the obligation of controlling private enterprise in dealing 
with land, at least explain why this control is, in certain stages of social 
progress, indispensable ; and why, in fact, it has been constantly put in 
force whenever public opinion or custom has not been strong enough to 
do without it." . . . . " And not merely does economic science, 



ON UNEQUAL TERMS. 283 

vene, the vast economic advantage possessed by the landlord 
class, as against a peasantry ignorant, inert and perhaps numer- 
ically in excess, is likely to operate with increasing severity, 
to impoverish the tenant class and to ultimately reduce their 
industrial efficiency, through deprivation of necessary clothing, 
food and shelter, as well as through the loss of hopefulness 
and self-respect. We saw that this might go on until almost 
the last stage of human misery should be reached, as in Ire- 
land, during the period before the great famine. 

371. Invidious Treatment of the Landlord and Capital- 
ist. — What might be true in a contrary case : how far laws 
prohibiting or limiting the payment of rent or interest framed, 
not with a view to offset certain weaknesses or unfortunate 
liabilities on the part of the tenant or borrowing class, but 
drawn in a spirit hostile to the owners of land or of capital, 
and designed to confiscate, for the benefit of other classes, or 
of the community as a whole, some part or all of what would 
otherwise be paid on these accounts : how far such laws might 
impair the productive capability of the community, we shall 
have occasion to discuss in Part VI., under the titles, The 
Unearned Increment of Land, and Usury Laws. I will so far 
anticipate that discussion as to say, that, while in commercial or 
manufacturing communities, the normal effect of severe restric- 
tions upon the payment of interest is at once to diminish the 
accumulation of capital for productive uses, and to prevent 
the existing body of capital from being applied where it will 
do the most good, such laws are, in such communities, so easily 
evaded that their practical influence is not very great. 

Secondly, the effects upon the cultivation of the soil of a 
reduction or confiscation of rent, by legal means, are not so 
clear as to be beyond dispute. The theory which underlies 
the land laws of nearly all states that can be called civilized, 
is, that the private ownership of land, with the incident of the 
acquisition by the owner of an " unearned increment " due to 

as expounded by its ablest teachers, dispose of a 'priori objections 
to a policy of intervention with regard to land, it even furnishes 
principles fitted to inform and guide such a policy, in a positive sense." 

— Prof. John E. Cairnes. 



284 POLITICAL ECONOMY. 

the exertions and sacrifices of the community as a whole, is 
essential to industrial progress ; and that not only those who 
are so fortunate as to be among the owners of land, but even 
those who have been born into the world without a title to a 
foot of soil, are benefited, and largely benefited, by the fact of 
private ownership. At the same time, it probably would not 
be claimed by any one that the care and pains of the individ- 
ual owner, to secure the proper cultivation and preservation 
of his land, are proportional to his share of the product. I see 
no reason to believe that a reduction of rent in the case of a 
given tract of land, through, say, some new economic force, 
would diminish the care and pains taken by the owner in 
respect to his property, so long as his interest remained still 
considerable. 

There have of late years appeared certain writers who 
claim that private ownership is not necessary to the fullest 
use of the soil which forms the natural endowment of any 
community. At least, they claim, the incident of an " unearned 
increment " is not necessary. They assert that all of rent 
proper (exclusive, that is, of the returns to actual investments 
of capital, in improvements) can be cut away without impair- 
ing the productive uses of the soil, though they admit that so 
much of the former rent might advantageously be left to the 
so-called owner as would constitute a reasonable commission 
to him, as the agent of society, for taking all needed care and 
pains with respect to the land. I believe this view to be alto- 
gether erroneous ; but it must be confessed that the error can 
not be shown as clearly and strongly as in the case of the 
argument for prohibiting interest. I shall defer to Part VI. 
whatever I may have to say further on this subject. 

372. Distribution as between Employer and Laborer.— 
So much for the possible action of distribution upon produc- 
tion, through causes operating to affect the shares of the 
product of industry going, as rent or as interest, to the owner 
of land or to the owner of capital. 

Of much more practical importance, in these modern times, 
is the influence exerted upon future production by the division 
of the remaining product between the employing and the 



WAGES VS. PROFITS. 285 

laboring class. I shall undertake to show that greatly to 
change the proportions existing between these two shares, at 
any time, may be to set in operation causes which will affect 
the future productive capability of the community, it may be 
to a wide extent, it may be through long periods of time. 

373. Beating Down Wages.— The economists of ten or fif- 
teen years ago, urged very strongly that a reduction of 
wages could not prove of ultimate injury to the laboring 
class. Thus Prof. Cairnes says : 

" Supposing a group of employers to have succeeded, as no 
doubt would be perfectly possible for them, in temporarily 
forcing down wages, by combination in a particular trade, a 
portion of their wealth previously invested would now become 
free. How would it be employed ? Unless we are to suppose 
the character of a large section of the community to be sud- 
denly changed in a leading attribute, the wealth so with- 
drawn from wages would, in the end, and before long, be 
restored to wages. The same motives which led to its invest- 
ment would lead to its re-investment, and, once re-invested, 
the interests of those concerned would cause it to be distribu- 
ted amongst the several elements of capital in the same pro- 
portion as before. In this way covetousness is held in check 
by covetousness, and the desire for aggrandizement sets limits 
to its own gratification." And in a similar vein, Prof. Perry, 
of our own country, wrote : " If in the division between 
profits and wages, at the end of any industrial cycle, profits 
get more than their due share, these very profits will wish to 
become capital, and will thus become a larger demand for 
labor, and the next wages fund will be larger than the 
last." 

374. Had we already discussed the principles which govern 
the consumption of wealth, it would be easy to show that 
Professors Cairnes and Perry are mistaken in their view of the 
necessary effects of an enlargement of profits at the expense 
of wages, inasmuch as a portion of such enhanced profits, 
instead of becoming capital (that is, wealth devoted to repro- 
duction), might become fine horses and houses, fine clothes 
and opera boxes ; while another portion might take the form 



286 POLITICAL ECONOMY. 

of coming to the office one hour later in the morning and 
going home one hour earlier in the afternoon. 

But, passing by this point, the entire argument by which 
the English and American economists generally have sought 
to establish what we may call " the economic indifference of 
the rate of profits," is still further defective, in that it neglects 
those very important considerations which relate to the pos- 
sible degradation of labor : that is, the reduction of the 
laborer from a higher to a lower industrial grade. 

375. The Degradation of Labor.— The constant imminence 
of this change, the smallness of the causes — often accidental 
in origin and temporary in duration — which may produce it, 
and the almost irreparable consequences of such a catastrophe, 
can hardly be set forth too strongly. 

The assumption which underlies the statements I have 
quoted is that the laboring classes, while suffering economic 
injury from any source, will themselves remain firm in their 
industrial quality, and await the operation of the restorative 
and reparative forces which shall, in time, set them right. 

The human fact, so often to be distinguished from the 
economic assumption, unmistakably is that there is, on the part 
of the working classes, unless protected in an umisual degree 
by political franchises, by the influence of public education, 
and by self-respect and social ambition, a fatal facility in sub- 
mitting to industrial injuries, which too often does not allow 
time for the operation of the beneficent principles of relief and 
restoration. The industrial opportunity comes around again, 
it may be, but it does not find the same man it left : he is no 
longer capable of rendering the same service ; perhaps the 
wages he now receives are quite as much as he earns. 

376. Let us consider the possible effects of a considerable 
reduction of wages. If the amount previously received had 
allowed comforts and luxuries, and left a margin for saving, 
the reduction would probably be resented, in the sense that 
population would be reduced by migration or by abstinence 
from propagation, until the former wages should be, if pos- 
sible, restored. But if the previous wages had been barely 
sufficient to furnish the necessaries of life, and especially if the 



THE DEGRADATION OF LABOR. 287 

body of laborers were ignorant and unambitious, the falling 
off in the quantity and quality of food and clothing and in 
the convenience and healthfulness of the shelter enjoyed 
would at once affect the efficiency of the individual laborer. 

With less food, which is the fuel of the human machine, 
less force would be generated ; with less clothing, more force 
would be wasted by cold ; with scantier and meaner quarters, 
fouler air and diminished access to the light would prevent the 
food from being fully digested in the stomach and the blood 
from being duly oxydized in the lungs, would lower the 
general tone of the system and expose the subject increasingly 
to the ravages of disease. In all these ways the laborer would 
become less efficient, simply through the reduction of his 
wages. 

377. The economists assert that whatever is taken from 
wages will increase capital, and hence quicken employment, 
and that this, in turn, will heighten wages. But we see that 
it is possible that what is taken from wages no man shall gain : 
it may be lost to the laborer and to the world. Now, so far 
as strictly economic forces are concerned, where enters the 
restorative principle ? The employer is not getting excessive 
profits, to be expended subsequently in wages ; the laborer is 
not under-paid ; he earns now what he gets no better than he 
formerly did his higher wages. 

This image of the degraded laborer is not a fanciful one. 
There are in Europe great bodies of population which have 
come in just this way to be pauperized and brutalized, 
weakened and diseased by under-feeding and foul air, hopeless 
and lost to all self-respect, so that they can scai'cely be said to 
desire any better condition, and still bringing children into 
the world to fill their miserable places in garrets and cellars, 
and in time in the wards of the workhouse. 

If such an injury as has been indicated may be suffered in 
respect to the physical powers of the laborer through the 
reduction of wages, quite as speedily may his usefulness be 
impaired through the moral effects of such a calamity. Just 
as the greatest possibilities of industrial efficiency lie in the 
creation of hopefulness, self-respect and social ambition, so 



288 POLITICAL ECONOMY. 

the greatest possibilities of loss lie in the discouragement or 
destruction of these qualities. We have seen through what 
a scale the laborer may rise in his progress to productive power. 
By looking back, we see through what spaces he may fall 
under the force of purely industrial disasters. 

378. The Argument from Self-interest. — But we may at 
this point be called upon to meet an objection, founded upon 
the assumed sufficiency of the principle of self-interest. How, 
it may be asked, is it possible that employers shall fail to pay 
wages which will allow their laborers a liberal sustenance, if, 
indeed, it be for their own advantage to do so ; if, by that 
means, the economic efficiency of the laborers will be thereby 
increased ? 

I answer, first, that the assumption of the sufficiency of self' 
interest to secure wise action is grotesquely wide of the mis- 
erable truth regarding human nature, to whatever department 
of activity we have reference. Mankind, always less than 
wise and too often foolish to the point of stupidity, on the one 
hand, or of fanaticism on the other, whether in politics or in 
domestic life, in hygiene or in religion, do not all at once 
become wise when industrial concerns are in question. 

The argument for feeding a hired laborer liberally, that he 
may work efficiently, applies with equal force to the maintenance 
of a slave ; yet we know too well that everywhere the lust of 
immediate gain has always despoiled the slave of a part, often 
a large part, of the food and clothing necessary to his highest 
efficiency. The same argument would apply to the case of 
live-stock. Yet it is almost impossible, by any amount of 
preaching and teaching, by any number of fairs and premiums, 
to keep a body of farmers up to the point of feeding cattle 
well and treating them well. The world over, the rule 
regarding the care of live-stock is niggardliness of expendi- 
ture, working deep and lasting prejudice to production. 

The foregoing would be a sufficient answer to the objection 
I have anticipated. On every hand we see true self-interest 
sacrificed to greed : why should it not be so in the case of the 
wages of hired labor ? 

But another and additional reason appears. It is that the 



ATTACKS UPON PROFITS. 289 

employer has none of that security which the owner of stock 
or the master of a slave possesses, that what goes in food shall 
come hack in work. A man buying an underfed slave or ox 
knows that when he shall have brought his property into good 
condition the advantage will all be his ; but the free laborer 
may at any time carry to another employer whatever of bone and 
sinew and nervous energy he may have gained through liberal 
subsistence. There is, as yet, no law which gives the 
employer compensation for " unexhausted improvements " in 
the person of his hired man. 

379. Beating Down Profits. — The foregoing comprises all 
I should three or four years ago have deemed it necessary to 
say, regarding the division of the product of industry between 
employers and employed, as affecting the future productive 
capability of a community. The normal position of the em- 
ployer is so clearly one of advantage, in competition with the 
employed, that it would have seemed scarcely worth while to 
inquire into the industrial effects of a pressure put upon the 
employing class so severe as to reduce the profits of business 
below the point required to secure the fullest employment of 
the land power, labor power and capital power of the commu- 
nity.* Even the introduction of Trade Unions into the field 
of industry can scarcely be said to have done more than offset 



* Oddly enough, many economists who have been serenely confident 
that any possible reduction of wages, under pressure from the employing 
class, would not injure the body of laborers, holding that whatever might 
thus for the time be taken from wages must infallibly, and before long, 
be restored to wages, [see remarks of Profs. Cairnes and Perry above], 
have manifested the greatest anxiety lest profits should be unduly 
reduced through the encroachments of wages. Not a few of these writers 
have formally warned the laboring class against demanding higher 
wages, lest they should so reduce the profits of business as to impair or 
destroy the employer's interest in production. It is difficult to see the 
consistency of these two opinions. If what is unduly taken from wages, 
by pressure from the employing class, is certain to be restored to wages, 
why may it not be that whatever is unduly taken from profits, by pres- 
sure from the laboring class, shall, in the end, be restored to profits ? If 
the economic harmonies exist, they surely must " work both ways." 



290 POLITICAL ECONOMY. 

the naturally great advantage enjoyed by the employing class, 
in competition for the product of industry. 

Within the last few years, however, attempts have been 
made, among us in the United States, to establish confedera- 
tions of labor, more far-reaching, more thoroughly organized, 
more authoritatively controlled, than the now familiar Trade 
Unions. Should the avowed purposes of those most conspicu- 
ously engaged in these efforts be accomplished, in whole or in 
any considerable degree, it would appear that the economic 
advantage might not only be shifted from the employing to 
the laboring class, but might there be so much enhanced as to 
require us to contemplate an extensive reduction of profits as 
a possible cause of impairment to the productive capability of 
the community. The further consideration of this topic will 
be postponed to Part VI., where we shall speak of the Knights 
of Labor. 

380. The Doctrine of Laissez Faire.— If such liabilities to 
an impairment of the productive capability of the community 
lie in the distribution of wealth, what becomes of the char- 
acteristic doctrine of the so-called Manchester School, laissez 
faire : hands off : leave economic forces to work, alike 
unaided and unhindered, in the assurance that the inter- 
ests of individuals will be found to harmonize so far with the 
interests of the community as to secure the highest welfare of 
each and of all ? 

On this point my views can not be expressed so well by 
phrases of my own devising, as in the language of an eminent 
English economist. 

" There is no evidence," says Prof. Cairnes, " either in what 
we know of the conduct of men, in the present stage of their 
development, or yet in the large experience we have had of 
the working of laissez /aire, to warrant the assumption that 
lies at the root of this doctrine. 

" Human beings know and follow their interests according 
to their lights and dispositions ; but not necessarily, nor in 
practice always, in that sense in which the interest of the 
individual is co-incident with that of others and of the whole. 
It follows that there is no security that the economic phenom- 



' ' LA rSSEZ FA IRE." 2 9 1 

ena of society, as at present constituted, will arrange them- 
selves spontaneously in the way which is most for the com- 
mon good. 

"In other words, laissezfaire falls to the ground as a sci- 
entific doctrine. I say as a scientific doctrine ; for let us be 
careful not to overstep the limits of our argument. It is one 
thing to repudiate the scientific authority of laissez /aire, 
freedom of contract, and so forth ; it is a totally different 
thing to set up the opposite principle of state control, the doc- 
trine of paternal government. For my part, I accept neither 
one doctrine nor the other ; and, as a practical rule, I hold 
laissezfaire to be incomparably the safer guide. Only let us 
remember that it is a practical rule, and not a doctrine of 
science ; a rule in the main sound, but, like most other sound 
practical rules, liable to numerous exceptions ; above all, a 
rule which must never, for a moment, be allowed to stand in 
the way of the candid consideration of any promising pro- 
posal of social or industrial reform." 



PAET V.— CONSUMFTION. 



CHAPTER I. 

SUBSISTENCE : POPULATION. 

381. What is Consumption ?— By the term consumption, 
in economics, we express the use made of wealth. This does 
not necessarily imply the destruction of the form or material 
of the commodities so used, or even the exhaustion of the 
value which had at some time been imparted to them. In 
general, however, the use of wealth involves, in a greater or 
less degree, loss of substance and change of form, with a 
decline, rapid or slow, in that power in exchange which we 
call value. 

" That almost all that is produced is destroyed, is true ; but 
we can not admit that it is produced for the purpose of being 
destroyed. It is produced for the purpose of being made use 
of. Its destruction is an incident to its use ; not only not 
intended, but, as far as possible, avoided."* That destruction 
may, in exceptional cases, be practically avoided altogether. 
An intaglio is consumed, in the economic sense, when it finds 
its place in the British Museum, where it may remain unim- 
paired through uncounted centuries. Certain hewn stones 
were consumed, in the economic sense, twenty-five hundred 
years ago, when they were lifted into their place in a Roman 
aqueduct. As hewn stones, simply, they had been commodi- 
ties, having a variety of possible uses. They might have been 
wrought into the fortifications of the city, or used in building 

*Prof. N. W. Senior. 



THE CONSUMPTION OF WEALTH. 293 

a temple, or an amphitheater, or a private palace. But when 
once they were applied to a definite use, they were, in the 
economic sense, consumed. They ceased to be merely hewn 
stones, to be sold by themselves, and subject indifferently to 
many uses ; they became inseparable parts of something else. 

Iron ore is consumed, i. e., applied to the end in view in its 
production, when thrown into the furnace, and here takes 
place almost instantaneously not only a great chemical change, 
but a complete loss of form. The iron bar or plate is in turn 
consumed, when it is fitted into a bridge, without undergoing 
any chemical or mechanical change at the time, to be thereaf- 
ter subject only to slow agencies of decay in the atmosphere, 
or to effects of attrition which, from one year to another, 
would be imperceptible. 

382. Consumption as a Department of Political Econ- 
omy. — Why should the economist interest himself, at all, in 
questions relating to consumption? Why, having traced 
wealth through its production, distribution and exchange, 
should he not leave it in the hands of the consumer without 
further inquiry, satisfied with its having reached the end for 
which it was created ? So have many, indeed most, econo- 
mists dealt with the uses of wealth, declining to recognize 
consumption as a department of political economy. 

It is, of course, competent to any writer on economics thus 
to limit the scope of his inquiry ; but I can not but deem it a 
subject of much regret that the fascinations of the mathemat- 
ical treatment of economic questions, and the ambition to make 
political economy an exact science, should have led to the 
practical excision of the whole department of consumption 
from so many recent works. For, after all, the chief interest 
of political economy to the ordinary reader, its chief value to 
the student of history, must be in the explanation it affords of 
the advance or the decline in the productive power of nations 
and communities ; and it is only in the consumption of wealth 
that we find the reasons for the rise of some and the fall of 
others, from age to age.* It is in the use made of the exist- 

* The late Prof. Jevons, in the introduction to his " Theory of Political 
Economy," after noting the close analogy to the science of Statical 



294 POLITICAL ECONOMY. 

ing body of wealth that the wealth of the next generation is 
determined. It matters far less for the future greatness of a 
nation what is the sum of its wealth to-day, than what are the 
habits of its people in the daily consumption of that wealth ; 
to what uses those means are devoted. That wealth may be 
applied to ends which inspire social ambition, which restrict 
population within limits consistent with a high per capita pro- 
duction, which increase the efficiency of the laborer and sup- 
ply instrumentalities for rendering his labor still more produc- 
tive, or it may be applied to ends which allow the increase of 
population in the degree that involves poverty, squalor and 
disease ; to ends which debauch the laborer morally and 
physically, striking at both his power and his disposition to 
work hard and continuously. When it is remembered that 
statisticians estimate the wealth of England at only five or six 
times the amount of its annual production, it will appear of 
how much more importance, in the large view of a nation's 
future, is the direction of its expenditures than the absolute 
amount of its accumulations, at any given time. The com- 
pleteness with which the French people, through their tem- 
perance, frugality and industry, combined with the strict 
repression of population, made up in a few years the terrific 
losses and fines of the German war, affords a very striking 
illustration of the virtue there is in the labor power of a 
country to replace its capital, if only a right consumption of 
the annual product be assured. 

383. Subsistence. — The primary use of wealth is for sub- 
sistence. In the earliest stages of human society, man, like 
the lower animals, had only one want. Like the lower ani- 
mals, he gathered his food, whether fish or flesh or nuts or 
berries, where he chanced to find it, and ate it without prep- 
aration. Long, however, before he began to cultivate food, 
even in the simplest way, he began to cook it. The discovery 

Mechanics presented by the Theory of Economy proposed by him, sig- 
nificantly says : " But I believe that Dynamical branches of the science 
of Economy may remain to be developed, on the consideration of which 
I have not at all entered." Elsewhere Prof. Jevons says : " We, first of 
all, need a theory of the Consumption of Wealth." 



MAN'S EARLIEST WANTS. 295 

of fire and its application to the preparation of food, is made 
by some writers upon primitive society to mark the boundary 
between the purely savage and the barbarous condition. 

Man is the only animal that has attained the capability of 
preparing food for consumption. All other species are con- 
tent with the animal or vegetable material. Man, even in the 
lowest of existent communities, demands for his subsistence 
something more than the raw material. It must be prepared 
or manufactured for his uses, though this may be by very rude 
and simple processes. 

384. Clothing and Shelter. — At what stage in the evolu- 
tion of the human kind, clothing and shelter, other than that 
furnished by the casual cave or by the foliage of the forest, 
became a requirement of the theretofore naked man, exposed 
unsheltered to the storm, we need not inquire. At moderate 
elevations throughout the zone in which the human race orig- 
inated, that requirement has never been onerous. The 
amount of effort there involved in providing the bamboo hut, 
the wigwam of poles and boughs, or the tent of skins, for 
protection against the rainy season, and in preparing the 
scanty garment of pelts or of cloth, demanded by comfort or 
by the awakened sense of decency, has never been great. 
Food still remains, in those regions, the one great requirement 
of human existence. 

When, however, mankind spread over higher altitudes or 
zones further removed from the equator, as tribes were driven 
up the mountain sides by victorious enemies, or were crowded 
toward the arctic or antarctic circles by the increasing scarcity 
of the casual food of the chase, of the fishery, or of the natural 
forest, the requirement of clothing, of shelter, and last of all, 
of fuel, came to be of increasing urgency and severity. 
Within certain limits, however, clothing, shelter and fuel are, 
in the higher latitudes, interchangeable with food, in the 
human economy. One of the prime purposes of food being 
there the maintenance of the warmth of the body, that occa- 
sion may, in part, be served indifferently by a certain amount, 
of food, or by clothing of a certain thickness applied to the 
frame, or by the combustion of a certain amount of fuel 



296 POLITICAL ECONOMY. 

within an inclosure, or of a larger amount of fuel in the open 
air. 

And here, as on the ten thousand occasions of a higher 
civilization, it is found that the greatest economy resides in 
the largest capitalization of labor. A dress of skins, which 
may have cost the effort of a week, will, during the time it 
lasts, more than replace, for purposes of warmth, food which 
would have required the efforts of many months. A hut which 
may have been a season in building, may save more in the 
food required for health and comfort, during the lifetime of 
the builder, than could have been obtained by the hunting or 
the fishing of years. 

385. Now let us suppose that, within some geographical 
division, the conditions of production are such that each adult 
male is able by steady labor to secure for himself consider- 
ably more, in the way of food, clothing, shelter and fuel, than 
is required for his own subsistence in health and strength to 
labor and in physical comfort, meaning, by this last, not 
much, only a freedom from pain and discomfort. It does not 
matter, whether the laboring population under consideration ob- 
tain the means of subsistence, as hunters, as fishermen, as herds- 
men, or as agriculturists. The question we have to ask is, 
what will these laborers do with the wealth they produce, 
after the strict needs of subsistence are met ; how will they 
consume it ? 

386. The Wife. — In the first instance, it may be assumed 
that each laborer will undertake the support of one adult 
female, and this, not out of charity, or compassion, not by the 
force of any legal arrangement, not with any reference to the 
continuance of the tribe, but in obedience to a natural 
instinct second only, in the demand it makes upon men, to 
the craving for food. The latter satisfied, the former asserts 
itself, irrepressibly, among all classes and conditions of men, 
in all states of human society. 

The woman with whose subsistence the laborer's income or 
annual production of wealth thus becomes charged, will, in 
greater or less degree, add to the means of the family thus 
formed. She will spin and weave, fashioning the fibrous 



THE WIFE. 297 

materials which the man has gathered, into garments, 
blankets, and nets. She will, in various ways, prepare the 
flesh, the fish, or the vegetable food, which the head of the 
family supplies, rendering it more palatable, more nutritious, 
more wholesome, or less perishable, according to the nature 
of the subject matter. She will bring water from the spring 
or brook. She will keep the hut or tent in a certain order 
and decency. 

While, thus, the female, in an early stage of industrial 
society, adds something to the family means, both by what 
she makes and by what she saves from waste, we may assume 
that, speaking broadly, she does not produce as much as she 
consumes. The margin of subsistence which the hunter, the 
fisherman, the herdsman, the tiller of the soil enjoys, is smaller 
after he has taken a wife than before. Nor is the contribu- 
tion made by the wife to the joint revenue of the family in 
any degree a determining cause of the formation of the 
family. 

We have, thus, the two earliest forms of the consumption 
of wealth, first, in the sustentation of the individual laborer, 
and secondly, in the maintenance of the wife. Let us sup- 
pose, for the further purposes of this discussion, that the pro- 
duction by the head of the family, increased by the wife's 
contribution, amounts to three and a half times what is neces- 
sary to support one adult person in health and strength to 
labor, and in physical comfort, according to the definition of 
that term already given. We have, then, to be deducted from 
this amount the subsistence of both husband and wife. 

387. The Child.— Now, we have to note the third great 
form of consumption, in the order of nature. The association 
of husband and wife is followed, in the vast majority of cases, 
by offspring. Races that are comparatively infertile, for what 
reason physiology can not say with confidence, are known to 
history, and some such are to-day in occupation of portions of 
the earth's surface ; while, among prolific races, are here and 
there found individuals who are sterile, from causes which 
physiology is equally unprepared to explain. The proportion 
of these exceptional cases among laboring populations is very 



290 POLITICAL ECONOMY. 

small. We may, therefore, disregard them in our argu- 
ment. 

The appearance of the child makes a new and imperative 
demand upon the revenue of the family. In the immediate 
instance, it diminishes the ability of the mother to render her 
accustomed services in the household and reduces her contri- 
bution to the joint income. Then and afterwards, for a long 
time, it causes a steady draft upon the resources of the father 
in the way of food and clothing. 

The demand thus made upon the family income is, within the 
limits of the father's ability, met, in general, fully and even 
cheerfully. It is not in obedience to the requirements of law, 
or because of any patriotic desire to make good the numbers 
of the community, or contribute to the strength of the state, 
or, on the other hand, from the consideration that these babes 
may, after the lapse of years, themselves become producers, 
and possibly, in time, become his support in his old age, that 
the father unquestioningly gives up to his children that mar- 
gin of subsistence, which, as a married man without children, 
he might have enjoyed. It is in obedience to a purely indi- 
vidual feeling, of an instinctive character, so generally planted 
in the human mind that, in spite of instances of parental neg- 
lect or cruelty, we may speak of it as universal. 

Here we have the third form in which wealth is consumed. 
It will be remembered that, thus far, we have supposed noth- 
ing to be done with the wealth produced in the primitive com- 
munity which has for its object display, luxury, or even the 
gratification of appetite beyond the actual requirements of 
subsistence. That wealth is applied to the support, first of the 
productive laborer, secondly, of the wife, taken in obedience 
to a natural craving which may be termed a universal instinct 
of mankind, and, thirdly, of the children springing from that 
union. 

388. Children in Excess.— Let us suppose that, with three 
children, of various ages, the subsistence which can be provided 
by the head of the family is fully taken up. These five persons, 
male and female, old and young, consume all that can be pro- 
duced, which we have assumed to be equal to the sustentation 



THE CHILD. 299 

of three and a half adults. If, now, other children are to 
appear to claim a support at the hands of the husband and 
father, what will be the result ? Clearly, a reduction in the 
standard of living. There will no longer be food, clothing, 
shelter and fuel adequate to maintain each and every member 
in health and strength, and without pain or discomfort result- 
ing from deprivation of things needful. The new-comers 
will, indeed, under the impulse of the parental instinct, be 
admitted to an equal participation in the family income ; but 
the share of each member of the family will be diminished. The 
pinch may come earliest and most severely at one point rather 
than another ; food may be denied, or fuel, or clothing, or 
shelter, according to circumstances; but, in one way or another, 
something less than what is necessary to maintain the mem- 
bers of the family in health and strength and comfort, is sup- 
plied. Of this the effects may be grouped in three forms : first, 
the reduction of vital force and labor power ; secondly, the 
diminution, perhaps the disappearance, of the subsistence 
fund heretofore laid up against the occurrence of bad seasons 
or the disability of the head of the family through accident or 
sickness, thirdly, the generation of infirmities and diseases of 
a transmissible character. 

389. The Effort of Nature to Restore Equilibrium. — Now 
let us, further, suppose this increase in the number of children 
beyond the limits of subsistence to have taken place uniformly 
throughout the tribe, but to have taken place once for all, 
not from a persistent but from a purely transient cause : will 
there be any effort of nature to restore the condition of gen- 
eral health, strength and comfort, which has been for the time 
lost? 

It is, indeed, true that nature will make an effort, first, 
through disease, which will have a greater destructive power 
upon an ill-sustained than upon a well-sustained community, 
especially in the case of children and of the aged ; secondly, 
through an impairment of the reproductive power of the adult; 
and, thirdly, through famine breaking upon a population whose 
store laid up against drought or flood or fire or the ravages of 
insects, has been, once for all, eaten up. But this effort of 



300 POLITICAL ECONOMY. 

nature will be unequal to the work to be done. The history 
of a thousand tribes shows that there is not sufficient force in 
famine or disease to prevent the permanent reduction of a 
community, through excess of numbers, from a condition of 
physical well-being to one of inadequate subsistence with 
consequent impairment of vital force and labor power. 

390. Solidarity of the Family.— Of late years, with the 
growing interest in biological investigation, there has been 
manifested a disposition, in certain quarters, to glorify priva- 
tion and famine, as agents in the uplifting of the human con- 
dition, the doctrine of the " survival of the fittest " being 
applied to societies of men without due consideration of a most 
important difference existing between men and other species 
of animals. 

It is the solidarity of the family which prevents the law of 
the survival of the fittest from exerting that power in raising 
the standard of size and strength and functional vigor among 
men, which it exerts throughout the vegetable and the animal 
kingdoms, generally. In the vegetable kingdom I suppose 
there are no traces of this solidarity of parent and offspring, 
although not being a botanist I can not speak with assurance. 
In the animal kingdom, exclusive of man, the solidarity of the 
family exists, indeed, but to a limited extent only, and for a 
brief period. The mother protects and nourishes her offspring 
most sedulously and devotedly ; drains her life-blood for its 
support, and will die in its defense ; but, in general, when the 
offspring is weaned the connection is broken. The lives 
become separated. The young must thereafter be their own 
providers and protectors. Mother and child become com- 
petitors for food in the same field or forest ; may even tear 
and kill one another in the struggle for existence. Thus the 
principle of survival obtains leave to operate. If the con- 
ditions of existence become hard, if subsistence is inadequate, 
the weak, the deformed, the sick, are run over, trampled on, 
killed out, while the fittest survive, acquire all the nourishment 
which is to be had, grow continually larger and stronger, 
breed only among themselves, and thus the standard of size 
and strength rises from generation to generation. 



SOLIDARITY OF THE FAMILY. 301 

With man, however, the conditions of the struggle for exis- 
tence are greatly changed. Generally speaking, that struggle 
is between families as units, not between individuals. Within 
the family, the young and old, the weak and the strong, male 
and female, are bound together by natural instincts, which are 
too strong for pain, for hunger, for death itself. If want or 
famine pinch, all suffer together. So far as any preference is 
given, it is to the younger and the weaker. The parent denies 
himself that the cries of the child may be hushed. If one 
member of the family fall sick, instead of being neglected, or 
even trampled on, as among the lower orders of animals, he 
commands the tenderest care of all. This, clearly, is not a 
condition under which the principle of " the survival of the 
fittest," however fierce may be " the struggle for existence," 
can operate among men, to raise the standard of size and 
strength and functional vigor. Instead of the natural elimina- 
tion of the weakest and the worst, it is here the best who, 
from sexual or parental love, bare their breasts to receive the 
blows of fortune. 

391. The Capabilities of the Procreative Force. — We 
have thus far inquired respecting the effects of an increase of 
the number of children in any community beyond the limits 
of subsistence, assuming for the moment the increase to be 
due to purely transient and adventitious causes. How is it as 
to the degree of activity and persistence in the procreative 
force, in the presence of a threatened reduction in the stand- 
ard of living below the point of health, strength and freedom 
from discomfort ? 

But, first, of the reproductive capability of mankind. It Is 
evident that the mere fact of children being born to parents 
does not, of itself, insure or threaten any increase of numbers 
from generation to generation. With the limits set to human 
life, reproduction in a certain degree may be only sufficient to 
make good the loss by death. It may be even less than is 
necessary to this end. Hence we must inquire what is the 
normal relation between births and deaths. 

In his celebrated treatise on " Population," Mr. Malthus 
assumed a birth rate sufficient to yield, in spite of occasional 



302 POLITICAL ECONOMY. 

celibacy and exceptional sterility, in excess of four children to 
a family. There is reason to believe that in any colony of 
European blood, planted on new land, of reasonably salubrious 
quality, within the temperate zone, this rate of increase would 
be reached, and, in the majority of cases, exceeded. That 
rate of reproduction alone, however, would be sufficient to 
secure an appreciable increase of each generation over the one 
preceding, were the facts of infant and of adult mortality but 
moderately favorable to the growth of population. 

392. Geometrical Progression.— Now, if we may assume 
for the members of successive generations an undiminished 
degree of fecundity, we have here all the conditions of a 
geometrical progression. And the possibilities of geometrical 
progression, when persisted in for a long time, become simply 
tremendous, whether in population, in wealth, or in any other 
direction. 

What is the characteristic of geometrical, as contrasted 
with arithmetical, increase ? It is that, in the former case, 
the increase itself increases: the fecundity of the original 
stock is transmitted through all that is successively derived 
from it. Thus, to take a series of ten terms, we might have 
Arithmetical : 2, 4, 6, 8, 10, 12, 14, 16, 18, 20. 
Geometrical: 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024. 

Here, in the arithmetical series, the difference between the 
ninth and tenth terms is the same as that between the first 
and second, viz., 2. In the geometrical series, the difference 
between the first and second terms is, also, 2 ; while, between 
the ninth and the tenth, it is 512. It would require more than 
five hundred terms to carry the arithmetical series to the 
point which, in the geometrical series, is reached in ten terms. 
It would require more than a million terms to carry the 
former series to the point reached by the latter in twenty-one 
terms ; a thousand million terms to carry the former series to 
the point reached by the latter in thirty-one terms. 

These tremendous leaps in the geometrical series, are due to 
the fact that the increase between the first and second terms 
becomes itself the cause of a proportional increase between the 
second and third terms ; which increase, in turn, becomes the 



GEOMETRIC INCREASE. 303 

cause of corresponding increase between the third and fourth, 
and so on to the end. Whereas, of the arithmetical series we 
may say that the entire increase comes out of the original 
stock, which continues to propagate at a constant rate, while 
all the successive increments so produced remain barren. 

393. Population Increases by Geometrical Progression. 
— Now it is according to the former and not the latter law, that 
population increases ; and as we said, the consequences of a 
persistence in a geometrical ratio, through a considerable 
period of time, are simply tremendous. " The elephant," says 
Mr. Darwin, "is reckoned the slowest breeder of all known 
animals, and I have taken some pains to estimate its probable 
minimum rate of natural increase. It will be safest to assume 
that it begins breeding when thirty years old, and goes on 
breeding till ninety years, bringing forth six young in the 
interval, and surviving till one hundred years old ; if this be 
so, after a period of from seven hundred and forty to seven 
hundred and fifty years, there would be alive nearly nineteen 
million elephants descended from the first pair /" 

Man, though a slow breeder, as compared with many of the 
lower animals, has a rate of reproduction far exceeding that of 
the elephant. Population has shown the capability, over a 
vast extent of territory, on more than one continent and 
through considerable periods of time, of doubling once in 
twenty-five years. With this capability we may say that, if 
" neither evil, nor the fear of evil " checked the population of 
the United States, it would, in a century and a-half , amount to 
three thousand two hundred millions. Of course this consum- 
mation could never be reached. Such a population would be 
impossible under the conditions of human existence. 

394. The Persistence of the Procreative Force.— Such 
being the capabilities of the procreative force, when operating 
unrestrained, let us inquire what virtue there is in the fear of a 
reduction of the standard of living below the point of health 
and physical comfort, to check population at that line. 

It is commonly assumed, in discussions relating to wages, 
that the laboring class will more and more withhold their in- 
crease as the conditions of life become harder and harder ; and 



3°4 POLITICAL ECONOMY. 

that any economic injuries which they may suffer, from what- 
ever cause, will, in the order of nature, he in this way repaired. 
Instead of it being true, however, that the laboring class tend 
thus to resist and resent any lowering of the standard of sub- 
sistence, the fact is that never is the procreative force more 
active than when the conditions of life become meager and 
squalid ; when the reserve of the summer against the winter, 
of the good year against the bad, is swept away by the clamor- 
ous necessities of to-day ; when alike enjoyment of the present 
and hope for the future are at their lowest point. Never had the 
marrying age been earlier, or christenings more frequent in 
Ireland than when, just upon the verge of the great famine, 
Earl Devon's Commission, in 1844, thus described the condi- 
tion of the peasantry : " In many districts, their daily food is 
the potato ; their only beverage, water ; their cabins are seldom 
a protection against the weather ; a bed or a blanket is a rare 
luxury ; and, in nearly all, their pig and manure heap constitute 
their only property." 

The state of the population of India and China affords a 
conclusive proof that there is not sufficient virtue in economic 
forces to keep population above the plane of extreme misery, 
if once it falls below the plane of comfort and decency. On 
the contrary, a moral weakness or recklessness is induced 
which tends strongly and swiftly to carry population to the 
point of industrial distress. Then, indeed, famine makes its 
appearance, as periodically in India, to set bounds to increase 
of numbers ; but, for the reasons that have been stated, this 
force does not operate, as in the animal kingdom exclusive of 
man, to cut off only the least active, aggressive, intelligent, or 
self-reliant. The effect of famine, and of the diseases gener- 
ated by famine, operating upon population across the barrier 
imposed by the solidarity of the family, is to lower the physical 
tone, to taint the blood, and weaken the will-power of the 
entire body, making it increasingly difficult, from generation 
to generation, to restore the lost conditions of economic well- 
being. 



AN ASCENDING SCALE. 305 

CHAPTER II. 

THE APPEARANCE OF NEW ECONOMIC WANTS. 

395. An Ascending Scale of Personal Consumption. — We 

have thus far dwelt on the effects of an increase of numbers 
beyond the limits of subsistence, as the latter are determined 
by the law of diminishing returns in agriculture. We have 
seen, that since the procreative force increases rather than dimin- 
inishes in the face of poverty and squalor, there is no nat- 
ural resting-place for population, if once it passes below the 
plane of ample subsistence, until it reaches the point where it 
meets the " positive checks " of famine and disease and, it may 
be added, of war.* This principle of population, to which we 
give the name, Malthusianism, was first clearly enunciated and 
fully illustrated by Mr. Malthus, in the last year of the last 
century, although intimated in the writings of earlier econo- 
mists, especially of the Italian Ortes. 

Let us now consider the relations of subsistence and popula- 
tion, on an ascending scale of personal consumption. We have 
seen that population will go on increasing as fast and as far as 
food is provided to support it, all increase of wealth surely 
taking the form of an increase of numbers, unless other and 
more imperative demands are made upon the income of the 
family. But let us suppose that, at the point where a compe- 
tent subsistence is provided to maintain the whole population 
in health and strength to labor, and in freedom from all dis- 
comfort resulting from privation of things absolutely neces. 
sary, the want of something beyond this comes to be strongly 
felt by the individual members of the community.! 

*" It is impossible," says Senior, "that a positive check so goading 
and remorseless as famine, should prevail without bringing in her train 
all the others. Pestilence is her uniform companion, and murder and 
war are her followers." 

f " The much greater number and the longer continuance of his wants," 
says Prof. Roscher, " are amongst the most striking differences between 
man and the brute. While the lower animals have no wants but neces- 



3°6 POLITICAL ECONOMY. 

396. Diversity of Early Economic Desires.— What that 
want may be does not matter for the purposes of the present 
discussion ; and, indeed, it would not be likely to be the same in 
the case of all communities. In one, the first want felt, after 
the absolute requirements for the support of life and laboring 
power are satisfied, is of ornament and decoration. Even when 
men are hardly covered from the cold and scantily nourished, 
the passion for display makes its appearance in forms that are 
ludicrous enough to the eye of the civilized man, but which 
have a most serious meaning to the barbarian and engross his 
faculties as completely as widely different objects do the fac- 
ulties of the Parisian. In another community, the first want 
felt after the claims of immediate bare subsistence are met, is 
of a store for the future and a provision against the caprices 
of the seasons and the casualties of life. Just as the ant — the 
ant of fable, at least, if not of the naturalist — differs from the 
butterfly, so have certain tribes of men, in the earliest condi- 
tion to which we can trace them, differed from others in this 
respect of care for the coming time. The first want emerging 
in the life of another community may be of wealth to be 
expended in worship and in honor of the national or local deity. 
Millions of men may consent to live squalidly that a few 
temples may shine like the sun, their altars smoke with unend- 
ing sacrifices, their priests walk resplendent with embroidered 
and jeweled vestments. In still other communities, the new 
want may take the form of a love, no longer of ornament, 
but of comely dress, or of desire for a diversified diet, or of a 
taste for leisure, or of a craving for some costly drug or drink, 
like the opium of the East Indian and the Chinaman or the 
fire-water of the North American Indian. 

Writers on economics have, indeed, endeavored to establish 
something like an order of natural succession for the various 
wants emerging in human experience : thus Prof. Senior says 

sities, and while their aggregate wants, even in the longest series of gen- 
erations, admit of no qualitative increase,the circle of man's wants is sus- 
ceptible of indefinite extension. And, indeed, every advance in culture 
made by man finds expression in an increase in the number and in the 
keenness of his rational wants." 



CHECKS TO POPULATION. 3°7 

that man's " first object is to vary his food ; " " the next desire 
is variety" of dress ; " " last comes the desire to build, to orna- 
ment and to furnish ; " I deem it, however, more consonant 
with what is known of communities having only a small mar- 
gin of living, to hold that the appearance of economic desires, 
beyond the need of bare subsistence, is governed by the moral 
and social characteristics of each race or tribe of men. 

397. Economic Wants Antagonize the Procreative Force. 
— Whatever be the passion or desire which is first developed 
in the mind of any community, it makes a demand upon the 
existing body of goods, or upon the current production of 
wealth, which at once antagonizes the strong and urgent dis- 
position, which has been indicated, to the consumption of 
wealth in the support of an increasing population. The newly 
awakened passion or desire can not be gratified out of the 
existing fund of wealth, unless the procreative force receive a 
check. Whether this shall be done or not, is a question upon 
the answer to which depends the whole economic future of 
the community. 

Any economic want may act in restraint of population in 
one or more of three ways : first, by diminishing the numbers 
of the marrying class, inducing celibacy among those who do 
not find the way to obtain an income adequate to the support 
of a family ; secondly, by procrastinating marriage ; and 
thirdly, by diminishing the birth-rate within the married state. 
The forces which operate in restraint of population may take 
any one of these three ways, or take them all, in which latter 
case the reduction of the ratio of increase will be very marked. 
If for example, the number of married pairs in a given com- 
munity were brought down from 100 to 80, by the spread of 
celibacy ; if, through later marriages, the child-bearing period 
for each married pair were reduced from twenty years to fif- 
teen, and if the interval between births were extended from 
two years to three, the number of children born under the lat- 
ter state of things would be, to the number born under the 
former state, as 40 to 100. 

398. A Diversified Diet. — Whatever be the want most 
commonly felt, after the requirements of mere subsistence are 



308 POLITICAL ECONOMY. 

met, there can, I think, be no question that the want which 
has been efficient on the largest scale, at once in promoting 
labor for its gratification, and in restricting the increase of 
population, is the craving for a diversified diet. Once let the 
traditional sole diet of the barbarian, be it fish, or flesh, or 
grain, be crossed with some other species of food, exciting 
thus the pleasure which resides in variety, and an economic 
force has been introduced into the life of the community which 
is capable of producing mighty results. 

Without claiming to speak with authority as a student of 
sociology, I should say that this has been the lever by which 
more tribes and races of men have been raised and kept, one 
degree, at least, above the condition of a population pressing 
all the time, at all points, upon the limits of subsistence, than 
by any other. 

A diversified diet, although doubtless it contributes, in a 
degree, to health and vigor, is yet a pure luxury in the sense 
that it is never sought on the former account, but wholly 
because of the gratification of appetite thereby secured. It 
will seem strange to those who have not studied the question 
of population, that an appetite for objects of luxury should 
be spoken of as having greater power to overcome the dispo- 
sition to indolence and the disposition to excessive procre- 
ation, than the fear of privation and actual misery. Yet so it 
is ; and as we go up the scale of human wants and desires, as 
viewed by the moralist, we shall find that, in general, the 
higher the want or desire, ethically considered, the stronger 
it proves to be. Mere sentiments, involving no gratification 
to any bodily sense, impel men to exertions the most painful 
and protracted, and hold in check the most masterful passion 
of the human kind, that passion which defies abject physical 
want and laughs in the face of famine and pestilence. 

399. Decencies. — Of narrower range in its application to 
tribes and races of men than the desire of a diversified diet, 
but of greater intensity and persistency within that range, is 
the desire of what we may call decencies, meaning thereby 
those things which are prescribed or required by public opin- 
ion. It is evident that the term decencies, in economics, must 



DECENCIES OR LUXURIES? 3°9 

have a very various application to different communities and 
to different classes within the same community. 

" The question whether a given commodity is to be con- 
sidered as a decency or a luxury, is obviously one to which no 
answer can be given, unless the place, the time and the rank 
of the individual using it be specified. The dress which in 
England was only decent a hundred years ago, would be almost 
extravagant now ; while the house and furniture which now 
would afford merely decent accommodations to a gentleman, 
would then have been luxurious for a peer. 

" The causes which entitle a commodity to be called a neces- 
sary, are more permanent and more general. They depend 
partly upon the habits in which the individual in question has 
been brought up, partly on the nature of his occupation, on 
the lightness or severity of the labors and hardships that he 
has to undergo, and partly on the climate in which he lives. 

"Shoes are necessaries to all the inhabitants of England. 
Our habits are such that there is not an individual whose 
health would not suffer from the want of them. To the lowest 
class of the inhabitants of Scotland they are luxuries. Custom 
enables them to go barefoot without inconvenience and with- 
out degradation. When a Scotchman rises from the lowest to 
the middling classes of society, they become to him decencies. 
He wears them to preserve, not his feet, but his station in life. 
To the highest class, who have been accustomed to them from 
infancy, they are as much necessaries as they are to all classes 
in England. 

"To the highest classes in Turkey, wine is a luxury, and 
tobacco a decency. In Europe, it is the reverse. The Turk 
drinks and the European smokes, not in obedience but in 
opposition both to the rules of health and to the forms of 
society. But wine in Europe and the pipe in Turkey are 
among the refreshments to which a guest is entitled, and 
which it would be as indecent to refuse in the one country as 
to offer in the other. 

" A carriage is a decency to a woman of fashion, a necessary 
to a physician, and a luxury to a tradesman." * 

* N. W. Senior. 



3 10 POLITICAL ECONOMY., 

400. The Desire of Decencies the Great Preventive Check 
to Population. — Whatever dignity the moralist may assign 
to the disposition to conform to the prevailing sentiments of 
the community, the economist must recognize this as the most 
effective motive which operates either to urge men to labor 
for the production of wealth, or to check the increase of pop- 
ulation after the condition of " diminishing returns " has been 
reached. It is in the latter respect that we have here espe- 
cially to do with it. " The great preventive check," says the 
wise economist so oft quoted in this chapter, " is the fear of 
losing decencies." If by this is to be understood the check 
which is of greatest potency where it operates at all, the 
remark is perfectly just. But, in fact, it is only in few com- 
munities that this cause operates with sufficient force to 
restrict population within the limits of the highest per capita 
production. In England, among the working classes repro-' 
duction has gone on with the least possible regard to its effect 
upon the standard of living. In France, on the other hand, 
even the peasantry are so fully alive to the inexpediency of 
a rapid multiplication, and are so temperate and prudent, that 
the excess of births over deaths has been reduced to a mini- 
mum. In the States of the American Union, the increase of 
population was, until recently, everywhere encouraged by the 
fact that the country had not reached the condition of dimin- 
ishing returns, but, on the contrary, as is always the case 
before that condition is reached, foreign immigration and 
native growth in numbers alike added to the power and wealth 
of the several communities. Within the past twenty-five 
years, the rate of natural increase in the Northeastern States 
has encountered a decided check, due to the rising standard 
of living in communities whose productive capabilities are 
already fully developed. 

401. Influence of a Popular Tenure of the Soil Upon 
Population. — There can be no question that the influence 
exerted upon population by a popular tenure of the soil is 
very conservative. The reasons therefor are thus stated 
by M. Sismondi : 

" In the countries in which cultivation by small proprietors 



SMALL FARMS VS. POPULATION. 3 11 

still continues, population increases regularly and rapidly 
until it has attained its natural limits : that is to say, inherit- 
ances continue to be divided and subdivided among several 
sons as long as, by an increase of labor, each family can 
extract an equal income from a smaller portion of land. A 
father who possessed a vast extent of natural pasture, divides 
it among his sons, and they turn it into fields and meadows ; 
his sons divide it among their sons, who abolish fallows ; each 
improvement in agricultural knowledge admits of another 
step in the subdivision of property. 

" But there is no danger that the proprietor will bring up 
children to make beggars of them. 

" He knows exactly what inheritance he has to leave them ; 
he knows that the law* will divide it equally among them ; 
he sees the limits beyond which partition would make them 
descend from the rank which he himself has filled ; and a just 
family pride, common to the peasant and the prince, makes 
him abstain from summoning into life children for whom he 
can not properly provide. If more are born, at least they do 
not marry, or they agree among themselves which of the sev- 
eral brothers shall perpetuate the family." 

The power of population strictly to limit itself, under the 
impulse to preserve family estates from undue subdivision, by 
the means adverted to in the closing sentence of the paragraph 
quoted, is strikingly illustrated by Prof. Cliffe Leslie in the 
facts which he adduces regarding the population of Auvergne, 
in France. In the mountains, it appears, the people cling 
with remarkable tenacity to the conservation of the inherit- 
ance unbroken. The daughters willingly consent to take 
vows and renounce all part in the common estate ; or, if they 
contract marriage, agree to leave to the head of the family 
their individual shares of the inheritance. It is the same with 
the sons, of whom some become priests ; others emigrate, 
consenting never to claim any part of the property. One of 
the sons remains at home, working with the father and 



* The law of so-called partible succession, prevailing widely over the 
western part of Continental Europe. 



312 POLITICAL ECONOMY. 

mother^ and becomes in time the proprietor of the ancestral 
estate. Thus the principle of equal partition, established by 
law, is eluded by the connivance of the family, it seldom 
occurring that the other children assert their claims, so fully 
accepted is this usage in the manners of the mountains. 

Prof. Leslie, after giving the foregoing as the substance of 
an official report, adds : " The renunciation by the emigrants 
of their share in the family property certainly shows, if not an 
extraordinary imperviousness to new ideas, an extraordinary 
tenacity of old ones ; and, in particular, of two ideas which 
are among the oldest in human society — subordination to the 
male head of the family, and conservation of the family prop- 
erty unbroken." 

From the London Times* I take the following testimony 
to the influence of an extensive ownership of land in antagon- 
izing the procreative force, and in winning for improved 
living, comfort, luxury, and security of condition, what would 
otherwise be usurped and wasted upon increase of population, 
with resulting squalor and poverty : 

" Over the greater part of France the standard of comfort 
and well-being has been increasing ever since the termination 
of the great war, in 1815. The country had been so drained 
and impoverished by the wars of Napoleon and by a century 
and a half of bad government, that the general misery of the 
population was indescribable, and the poverty even of the 

landed proprietors and middle classes was very great 

For many years comfort and well-being, and even luxury, 
have made their way into the households of all classes in 
France. The standard of living has risen enormously. The 
habits of saving and thrift have not been neglected. In the 
art of managing and regularizing their lives, the French peo- 
ple are unrivaled and the object of every family is to live well 
and to save, at the same time, so as to be able to leave their 
sons and daughters in as good a position as themselves, at all 

events, and in a better, if possible Among people with 

such habits and such views of life, the risk and expenditure 

*January 25, 1883. 



ATTACKS UPON MALTHUSIANISM. 313 

attendant upon a large family are naturally regarded with 
horror. ' Since two or three children give us sufficient enjoy- 
ment of the pleasures of paternity, why,' the greater number 
of Frenchmen argue, ' should we have more ? With two or 
three children we can live comfortably, and save sufficient to 
leave our children as well off as ourselves ; a greater number 
would involve curtailment of enjoyments both for ourselves 
and our children.' " 

402. Attacks Upon the Doctrine of Malthus.— The views 
respecting the relations of population and subsistence con- 
tained in the foregoing paragraphs are essentially those which 
are known as Malthusian. Mr. Malthus unquestionably com- 
mitted some errors of statement and faults of reasoning in 
his original enunciation of the principles of population, as is 
likely to be the case on the first promulgation of great econ- 
omic or social laws ; and during his whole life he was closely 
followed by criticism and abuse. Since Mr. Malthus' death 
has taken all personal interest out of the controversy over 
the principles of population, and Malthusianism has come to be 
merely a name for a body of doctrine, the views here pre- 
sented have been a butt for the headless arrows of begin- 
ners in economics and of sundry sentimental sociologists. 

Meanwhile the doctrine (l) that there resides in nearly all 
races and tribes of men a strong, urgent, persistent disposition 
to carry the increase of population beyond the limits of ade- 
quate subsistence ; (2) that very few, even among the noblest 
of modern communities, have shown the capability to check 
reproduction at the line of the highest per capita production 
of food, clothing, shelter and fuel ; (3) that, if this line be 
once over-passed, the procreative force proceeds thereafter 
with augmented force ; (4) that, if the desire of luxuries and 
decencies does not prevail to stop the increase of population, 
the fear of losing necessaries, and even the actual experience 
of privation and suffering almost certainly will fail to do so ; 
(5) that, through the dominion of this imperious instinct, 
nearly all the communities of men are under the constant im- 
minence of being swept away into misery, squalor and disease, 
this doctrine which we term Malthusianism has stood unshat- 



3M POLITICAL ECONOMY. 

tered, impregnable, amid all the controversy that has raged 
around it. 

403. Prof. Senior's Statement.— I can not forbear again to 
quote this eminently wise economist, to whose criticisms, in- 
deed, Mr. Malthus owed the correction of some of the faults 
of his original statement of the principles of population. Prof. 
Senior says : 

" Although we believe that, as civilization advances, the 
pressure of population upon subsistence is a decreasing evil, 
we are far from denying the prevalence of this pressure in all 
long settled countries : indeed, in all countries except those 
which are the seats of colonies applying the knowledge of an 
old country to an unoccupied territory. 

" We believe that there are few portions of Europe the 
inhabitants of which would not be richer if their numbers 
were fewer, and would not be richer hereafter if they were 
now to retard the rate at which their population L increasing." 



CHAPTER III. 

CONSUMPTION : THE DYNAMICS OF WEALTH. 

404. The Potato Philosophy of Wages.— We have, thus far, 
spoken of economic wants, mainly in their effects as retarding 
the increase of numbers. Until an adequate check, of a suffi- 
ciently persistent character, has been secured here, the econo- 
mist who fully appreciates the consequences of over-popula- 
tion can hardly fail to recognize almost every economic want, 
whatever its origin or its object, and however little either may 
be approved by the moralist or physiologist, as being better 
than none. 

It has been from this point of view, that the English writ- 
ers have insisted so strongly that cheap food is a thing to be 
deprecated. 

Thus Mr. J. R. McCulloch says :— -" When the standard of 
natural or necessary wages is high — when wheat and beef, for 



DEAR VS. CHEAP FOOD. 315 

example, form the principal part of the food of the laborer, 
and porter and beer the principal part of his drink, he can 
bear to retrench in a season of scarcity. Such a man has room 
to fall ; he can resort to cheaper sorts of food — to barley, oats, 
rice and potatoes. But he who is habitually fed on the cheap- 
est food has nothing to resort to, when deprived of it. Labor- 
ers placed in this situation are absolutely cut off from every 
resource. You can take from an Englishman ; but you can 
not take from an Irishman. The latter is already so low, he 
can fall no lower ; he is placed on the very verge of existence ; 
his wages, being regulated by the price of potatoes,* will not 
buy wheat, or barley, or oats ; and whenever, therefore, the 
supply of potatoes fails, it is next to impossible that he should 
escape falling a sacrifice to famine." 

And Prof. Thorold Rogers says : "A community which 
subsists habitually on dear food is in a position of peculiar 
advantage, when compared with another which lives on cheap 
food, one for instance, which lives on wheat, as contrasted 
with another which lives on rice or potatoes ; and this, quite 
apart from the prudence or incautiousness of the people." 

405. Better Things Than Dear Food. — Clearly, the basis 
of this reasoning is the Malthusian doctrine. These econo- 
mists recognize the strong probability, the almost certainty, 
that a people will carry their increase closely up to the limits 
of subsistence according to the kind of food they use, what- 
ever that may be. If it be the lowest and cheapest, like rice 
in India and potatoes in Ireland, the failure of the crop means 
starvation, no adequate reserve being expected to be provided, 
on a sufficient scale, by the population of any country. If the 
kind of food be higher and dearer, the masses may, in the event 
of a failure of the crop or crops concerned, fall back for the 
time upon the lower and the cheaper. 



* Dr. Travers Twiss states that it was calculated prior to the famine, 
that two-thirds of the population of Ireland lived wholly on potatoes. 
Sir Arch. Alison says •• " Three times the number of persons can be fed 
on an acre of potatoes who can be maintained on an acre of wheat in 
ordinary seasons." 



316 POLITICAL ECONOMY. 

But suppose this danger of an increase of numbers, fast fol- 
lowing up subsistence, crowding all the time upon the limits 
of food, to be once for all passed. Suppose we have a commu- 
nity which will accept the opportunity of living upon cheap 
food and apply the saving to the permanent enlargement of 
their capital, or to other forms of enjoyment/, to dress, to 
better lodgings, to luxuries, perhaps to expenditures upon 
education and culture. What harm, then, would Mr. McCul- 
loch or Prof. Rogers find in cheap food, be it potatoes, or 
rice, or the Indian corn of America ? Surely none. The more 
is saved from the cost of food, the more can be spent upon 
making homes ample and comfortable, healthful and decent, 
the more can be spent upon school-houses and churches, upon 
books and periodicals, upon literature and music and art. The 
wife may be let to stay at home and keep the house ; the 
children be given their time, to acquire an education and to 
secure for themselves a thorough preparation for their work 
in life. 

Let me not be understood as quarreling with this potato 
philosophy of wages so far as the assumption which underlies 
it, viz., that population will inevitably keep close up to the 
limits of subsistence on the kind of food, whatever that may 
be, which forms the popular diet, is justified by the facts of 
society, as it very widely is. I only claim that, in any country 
whose people had shown the capability of setting bounds to 
the increase of population by the exercise of their own judg- 
ment and will, cheap food would become a means of increas- 
ing the comforts and luxuries enjoyed by that people in other 
directions of expenditure, or of enlarging the capital and im- 
proving the productive agencies at their command. 

406. The Dynamics of Wealth.— As a means of checking 
the increase of numbers, which otherwise would surely carry 
population to the point of misery, famine and pestilence, 
the appearance of almost any economic want must be greeted 
as a good, without much respect to the origin or object of that 
want. But the moment the capability of the self -limitation 
of population is assured, the economist discovers wide differ- 
ences between the various demands for the consumption of 



THE DYNAMICS OF WEALTH. 3 X 7 

the existing body of wealth, made by the differing appetites 
and desires of different communities, or of different classes in 
the same community, as regards the influence of those various 
forms of consuming wealth upon the power and the disposition 
to create values in the future.* 

It is here we find the body of economic literature most 
deficient. We need a new Adam Smith, or another Hume, to 
write the economics of consumption in which would be found 
the real Dynamics of Wealth ; to trace to their effects upon 
production the forces which are set in motion by the uses made 
of wealth ; to show how certain forms of consumption clear 
the mind, strengthen the hand and elevate the aims of the 
individual economic agent, while promoting that social order 
and mutual confidence which are favorable conditions for the 
complete development and harmonious action of the industrial 
system ; how other forms of consumption debase and debauch 
man as an economic agent, and introduce disorder and waste 
into the complicated mechanism of the productive agencies. 
Here is the opportunity for some great moral philosopher, 
strictly confining himself to the study of the economic effects 
of these causes, denying himself all regard to purely ethical, 
political or theological considerations, to write what shall be the 
most important chapter of political economy, now, alas, 
almost a blank. 

407. Two Popular Fallacies Concerning Consumption.— 
In a preceding chapter, we discussed the question, how it is 
that there can be, at any time, with abounding natural resources, 
unemployed labor power, unemployed capital power, no lack of 
disposition on the part of the owners of capital to secure a 
return from the productive use of their property, no lack of dis- 

* When we remember that the expenditure of the people of Great 
Britain, annually, for alcoholic beverages, reaches the enormous sum of 
£180,000,000, or $900,000,000, four-fifths, at least, of which is spent in 
a way that is not only without any beneficial effect, but is positively 
injurious, a large part of it going to the destruction of moral, intellectual 
and physical power, we get a rude measure of the force which a wiser 
consumption of wealth might introduce into the economic life of that 
country. ', 



3l8 POLITICAL ECONOMY. 

position on the part of laborers to earn wages by work, and 
yet an enforced idleness, with resulting poverty and squalor. 
Two popular explanations of this condition of things are always 
sure to be offered during the continuance of " hard times," one 
of which finds its expression in the sounding phrase, " over- 
production," while the other emphasizes its supposed antag- 
onism to the theory of the over-productionists, by the use of 
the term " under-consumption." 

A brief reference to the conditions under which wealth is 
produced, will suffice to show that, like all condensed phrases, 
each of these large words signifies more than one thing ; that, 
in certain senses, each phrase embodies a great deal of arrant 
nonsense ; that, taken otherwise, each embodies a vital truth ; 
and, finally, that, so far as either means any thing at all, that 
meaning is exactly identical with what is expressed by the 
other. 

408. Over-production, — All producers are also consumers. 
Men produce only because they desire to consume. They pro- 
duce only so much as they desire to consume. Any given 
producer may, however, desire to realize his enjoyment either 
now, or at a future time ; either in satisfying his own personal 
wants and appetites, or in satisfying those of friends, children 
or beneficiaries. 

The idea of over-production, therefore, involves the absurd- 
ity of supposing that men will labor to produce that which 
they have not the desire to consume. 

But passing over this initial absurdity, we observe in the 
use of this phrase, a vague notion that the amount of necessaries, 
comforts, and luxuries, which a community, at any given 
stage of its progress, is prepared to consume is a definite 
amount ; and that, if the amount produced is somewhat rapidly 
increased, the capacity for consumption will be outrun, and men 
will stand, without appetite, before a mass of good things, for 
which they know no uses and with which they are, for the time, 
utterly at a loss to deal. 

The fallacy of this will sufficiently appear if we ask, not 
who are the men able and willing to make away with a vastly 
greater body of wealth than they find themselves in possession 



O VER-PROD UCTION. 3 r 9 

of, but who are the men who would not be found willing and 
able to do this ? Is there any mechanic or laborer, receiving 
wages to the amount of $300 or $500 a year, who could not, 
and would not gladly, spend $600 or $1,000 ? Is there any mer- 
chant or professional man or man of leisure, with an income 
of $3,000 or $5,000, or $10,000, who could not easily give 
account of an income of $6,000, or $10,000, or $20,000 ? It is 
absurd to suppose that the limit of consumption can be reached. 
What with houses and horses, clothes, equipage, and travel, 
costly viands and drinks, any civilized community could 
instantly double, quadruple, or decuple its consumption of 
wealth were the wealth provided. 

409. Under-consumption — In like manner, the phrase, 
under-consumption, involves an initial absurdity, when applied 
in explanation of so-called " hard times." Thus, during the 
period of 1876-9, it was said that the people of the United 
States were suffering from under-consumption ; yet, not for 
a long period, if ever, had consumption followed so quickly 
upon production ; had the food earned been so quickly eaten ; 
had the margin of saving been so small, as during the years 
referred to. A strange term, truly, to apply to such a condi- 
tion : this under-consumption ! 

But passing by this initial absurdity, we find that beneath 
the phrase, under-consumption, lurks the notion that, some- 
how or other, wealth when once produced is in danger of get- 
ting in the way, so that other wealth can not be produced 
until this be first eaten or drunk or burned up, or by some 
means gotten rid of. As a matter of fact, there has never 
been any accumulation of wealth on the earth's surface so great 
as to impede the further production of wealth, and there is not 
likely to be. Were men willing to produce wealth without 
consuming it, they could go on forever. Of course, men will 
not, in general, produce more than they desire, sooner or later, 
to consume. 

410. Over-production and under-consumption mean the same 
thing, and that is under-production. This is, of course, a mere 
jangle of words, until the phrases are qualified, as they should 
be. Over-production, as alleged by those who would explain 



320 POLITICAL ECONOMY. 

hard times, is partial over-production, production, that is, 
which has gone on in certain lines, generally under speculative 
impulses, until it has exceeded the normal, or even, possibly, a 
highly stimulated demand. This excess of supply in certain 
lines leads to the accumulation of vast stocks of unsalable 
goods,* which involves partial under-consumption, these stocks 
melting slowly away through a period extending over months, 
it may be, years. Meanwhile, general under-production is the 
result. The bodies of labor and capital which have been called 
into the over-done branches of industry, can not readily, if at 
all, be transferred to other branches ; they remain where they 
are, half employed, waiting for the renewal of demand. In the 
dreary interval, producing little, they have little with which to 
purchase the products of others, who are consequently com- 
pelled to restrict their production proportionally, as was shown 
in pars. 237-40. 

In this way it is we vindicate our paradox that over-produc- 
tion means nothing more or less than under-production, or, 
for that matter, than under-consumption. There is no over- 
production possible, except a partial over-production, an over- 
production in certain lines, which inevitably involves a low- 
ering of the scale of production as a whole : that is, partial 
over-production involves general under-production. 

It is under-production which makes hard times. Over-pro- 
duction, general over-production, is impossible, and, were it 
to occur, were the creation of wealth to outrun men's capacity 
to consume, no one would be injured thereby. But under-pro- 
duction is an unmistakable evil. It means less wealth pro- 
duced, and consequently fewer of the comforts and necessaries 
of life, on the average, to each member of the community. 
To large classes it means hunger, cold and squalor ; debility, 
sickness and premature death. 

411. The Destruction of Wealth — We have already 
adverted to the fact of the extensive destruction of wealth, by 

* The result is the same if the distorted production of the past has 
taken the form of an excess of machinery and plant in some lines or 
in many lines of manufacture, or an excess of the means of transporta- 
tion. 



MAKING TRADE GOOD. 3 21 

accident or by natural causes, as affording an explanation, in 
part, of the comparatively slow progress of accumulation, even 
in the states whose land power, labor power and capital power 
are greatest. We have now to deal with the same fact, in our 
theory of consumption. 

A most stubborn belief appears among the non-agricultural 
masses of every community where wages or labor or wealth is 
a topic of familiar discussion, to the effect that the destruction 
of wealth in some way increases production. Laboring people 
generally hold to this ; our servants believe it religiously, and 
justify themselves, secretly or openly, for all their breakage and 
wastage by the plea that it " makes trade good." Even culti- 
vated persons are not free from an instinctive feeling that the 
abrupt removal of the existing body of wealth quickens indus- 
trial activity and promotes the general welfare, though it may 
be at the cost, for the time, of individuals. 

Frederic Bastiat, in one of his capital little essays, has dealt 
with this notion so cleverly that there can be no excuse for 
any writer using his own phrases on this theme. 

412. The Broken Pane. — " Have you ever had occasion to 
witness the fury of the honest burgess, Jacques Bonhomme, 
when his scapegrace son has broken a pane of glass ? If you 
have, you can not fail to have observed that all the bystanders, 
were there thirty of them, lay their heads together to offer 
the unfortunate proprietor this never-failing consolation, that 
there is good in every misfortune, and that such accidents 
give a fillip to trade. Every body must live. If no windows 
were broken, what would become of the glaziers ? Now, this 
formula of condolence contains a theory which it is proper to 
lay hold of in this very simple case, because it is exactly the 
same theory which unfortunately governs the greater part of 
our economic institutions. 

" Assuming that it becomes necessary to expend six francs 
in repairing the damage, if you mean to say that the accident 
brings in six francs to the glazier, and to that extent encourages 
his trade, I grant it fairly and frankly, and admit that you 
reason justly. 

" The glazier arrives, does his work, pockets his money, rubs 



322 POLITICAL ECONOMY. 

his hands, and blesses the scapegrace son. That is what we 
see. 

" But if, by way of deduction, you come to conclude, as is 
too often done, that it is a good thing to break windows — that 
it makes money circulate — and that encouragement to trade 
in general is the result, I am obliged to cry, halt ! Your 
theory stops at what we see, and takes no account of what we 
don't see. 

" We don't see that since our burgess has been obliged to 
spend his six francs on one thing, he can no longer spend 
them on another. 

" We don J t see that if he had not this pane to replace, he 
would have replaced, for example, his shoes, which are down 
at the heels ; or have placed a new book on his shelf. In 
short, he would have employed his six francs in a way in 
which he can not now employ them. Let us see, then, how the 
account stands with trade in general. The pane being broken, 
the glazier's trade is benefited to the extent of six francs. 
That is what we see. 

" If the pane had not been broken, the shoemaker's or some 
other trade would have been encouraged to the extent of six 
francs. Tliat is what we don't see. And if we take into 
account what we don't see, which is a negative fact, as well 
as what we do see, which is a positive fact, we shall discover 
that trade in general, or the aggregate of national industry, 
has no interest, one way or other, whether windows are broken 
or not. 

" Let us see, again, how the account stands with Jacques 
Bonhomme. On the last hypothesis, that of the pane being 
broken, he spends six francs, and gets neither more nor less 
than he had before, namely, the use and enjoyment of a pane 
of glass. On the other hypothesis, namely, that the accident 
had not happened, he would have expended six francs on 
shoes, and would have had the enjoyment both of the shoes 
and of the pane of glass. 

" Now as the good burgess, Jacques Bonhomme, constitutes 
a fraction of society at large, we are forced to conclude that 
society, taken in the aggregate, and after all accounts of labor 



DESTRUCTION OF WEALTH. 323 

and enjoyment have been squared, has lost the value of the 
pane which has been broken." 

413. Destruction sometimes the Removal of Obstruction. 
— It is, of course, possible to conceive a situation where the 
destruction of wealth may have the direct effect to secure a 
larger production of wealth. Thus, a man may occupy a cer- 
tain water privilege with an antiquated mill, which he can 
not make up his mind to tear down. To destroy the mill 
seems to him like waste, or, even if he appreciates the fact 
that the erection of a new and more commodious structure, 
with modern appliances, would be true economy, he can not 
bring himself to incur the initial expense just at this time ; he 
procrastinates in the matter, and so perhaps goes on, year after 
year, cramped in his operations, perhaps unable even to under- 
take production in certain lines, for which there is an advan- 
tageous opening. Now, in such a case, it might happen that the 
burning down of the old mill would lead to the immediate 
erection of a new one which would pay for itself in a short 
time, and the net result, thereafter, be the substitution of a 
powerful and efficient agent of production for one that was 
inadequate and outworn. 

Undoubtedly, too, the destruction by fire of the old and 
crooked parts of certain cities, filled with rookeries and tumble- 
down houses, almost impassable to traffic and repulsive of aspect, 
has led to an actual increase of wealth within a short time 
thereafter. The quarter destroyed may have been long a 
nuisance and an obstruction to the growth of the city and the 
development of its trade ; but the inertia of property owners, 
their blindness to their large, their permanent interests, their 
reluctance to make great capital expenditures, and especially 
the fact that it was of no use for a single property owner to 
try to improve the quarter by tearing down his rookeries, so 
long as the general character of the neighborhood remained 
what it had been, these causes might have long withstood the 
needed improvements. The fire comes, resolves all doubts, 
burns up the accumulated foulness of generations, leaves the 
ground open to building, and, six months or a year thereafter, 
a new and elegant quarter has arisen from the ashes. Not all, 



324 POLITICAL ECONOMY. 

not by any means the larger part, of this represents the pro- 
duction of wealth in the interval. The greater share repre- 
sents the transplanting of wealth previously existing. Yet, in 
addition, there may, as we said, conceivably have been a large 
creation of values due to the improvement of commercial sites 
and commercial avenues heretofore neglected. 

Such instances of the destruction of wealth leading to a 
larger production are comparatively rare. In the vast major- 
ity of cases, that destruction, however rejoiced over by shallow 
persons who are influenced only by " what they see," or by 
selfish persons who secure an immediate individual advantage 
from the loss of others, is a public misfortune. 

414. Government Expenditure — On the part of many, 
perhaps most, persons who favor large government expendi- 
tures, the actuating motive is found in the opinion we have 
already dealt with, that wasteful and even destructive consump : 
tion " makes trade good," " encourages industry," " raises 
wages," etc. To this shallow notion we need pay no further 
attention. Something which is at least less obviously false is 
intended in the proposition laid down by more than one econo- 
mist of reputation, that government expenditures, within mod- 
erate limits, are industrially beneficial. 

This view may be stated in the language of Mr. McCulloch, 
one of the most careful of the English economists of the last 
generation : — 

" A moderate increase of taxation has the same effect on the 
habits and industry of a nation that an increase of his family 
or of his necessary and unavoidable expenses has upon a 
private individual 

" But we must be on our guard against an abuse of this doc- 
trine. To render an increase of taxation productive of greater 
exertions, economy and invention, it should be slowly and 
gradually brought about, and it should never be carried to such 
a height as to incapacitate individuals from making the sacrifices 
it imposes by such an increase of industry and economy as it 
may be in their power to make, without requiring any very 
violent change in their habits. The increase of taxation must 
not be such as to make it impracticable to overcome its influ- 



GOVERNMENT EXPENDITURES. 325 

ence, or to induce the belief that it is impracticable. Difficulties 
that are seen to be surmountable sharpen the inventive power 
and are readily grappled with ; but an apparently insurmount- 
able difficulty, or such an excessive weight of taxation as it 
was deemed impossible to meet, would not stimulate, but des- 
troy exertion. Instead of producing new efforts of ingenuity 
and economy, it would produce only despair. Whenever taxa- 
tion becomes so heavy* that the produce it takes from individuals 
can no longer be replaced by fresh efforts, they uniformly cease 
to be made ; the population becomes dispirited, industry is 
paralyzed and the country rapidly declines." 

And to the same effect Jeremy Bentham writes : " By rais- 
ing money as other money is raised, by taxes (the amount of 
which is taken by individuals out of their expenditure on the 
score of maintenance), government has it in its power to accel- 
erate to an unexampled degree the augmentation of the mass 
of real wealth." 

415. Such is the claim in behalf of government expendi- 
ture. What is to be said of it ? Let us proceed by way of 
an example. Let us take a large population spread over a vast 
extent of country, like India, which possesses almost illimita- 
ble facilities for the improvement of the soil through irriga- 
tion, and whose broad spaces demand numerous and extensive 
lines of artificial communication, by canal or railway. Let it 
be supposed that the people occupying this country are what the 
people of India now are, in numbers, in character, in habits of 
living and of working. Alike under the influence of sexual 
passion and of religious superstition, f they continually tend to 
increase up to the limits of subsistence, even to the verge of 

* I can not forbear to quote the words of Bacon: " The blessing of 
Judah and Issachar will never meet : that the same people should be 
both the lion's whelp and the ass between burdens ; neither will it be 
that a people overlaid with taxes should ever become valiant and mar- 
tial." 

f The early marriages of India are attributed to the religious beliefs of 
the people, as they hold that the welfare of the soul after death depends 
greatly on the performance of the burial ritea by male offspring of the 
deceased. 



326 POLITICAL ECONOMY. 

famine ; not only accumulating no capital, but laying by no 
store for futui'e wants ; having neither the genius for organi- 
zation nor the capacity of self-denial which would be required 
to initiate the simplest local improvements. 

Now, we may imagine such a population ruled by a benevo- 
lent, disinterested despot of the highest order of intelligence, 
a Napoleon devoted to the arts of peace. We may imagine 
this ruler, by a system of taxation that shall be as just 
between individuals and as judicious in its seasons and 
methods as human wisdom can make it, first, drawing from 
the crops of good years a store against the occurrence of bad 
harvests ; then, by a gradually increasing stringency of 
exaction, adding to the cost of living in such a way as to dis- 
courage the growth of population, while applying the proceeds 
to great public improvements which enable the food supply, 
of the empire to be readily equalized in the event of local 
scarcity; which guard the crops against the effects of periodi- 
cal drought ; which afford rapid and cheap passage to the 
products of inland districts. 

And as the productive power of the country increased under 
such an administration, we can imagine the high-minded ruler, 
intent on his benevolent purpose, still drawing away from the 
people, by taxation, all the surplus above the necessary cost of 
subsistence for the present population, which might otherwise 
be applied to the increase of population, and, with the means 
thus acquired, providing capital in its various forms for the 
use of the frugal and the temperate, perfecting communica- 
tions, protecting the health and lives of his subjects by sani- 
tary arrangements, and, at last, undertaking the elementary 
education of the whole body of the people. 

All this, it is clear, an absolute ruler of the character indi- 
cated might do for his people ;* and not a little of this many 

* This is, in fact, involved in the theory of the British administration 
of India. The reasons are well stated in the following paragraph from 
the Times of 1879 : 

" In England the remission of taxation is urged with great force, 
because it is said that taxes remitted will fructify in the pockets of the 
people. No result of this kind can be expected in India. If the condi- 



GOVERNMENT EXPENDITURES. 3 2 7 

a benevolent and able ruler has done for his people. The 
" forced frugality," to use Bentham's phrase, which his taxes 
have imposed, has at once repressed population and stimulated 
industry among the existing body of laborers. His wise 
expenditures upon public works and in public education has 
sown the seed from which has sprung many a golden harvest. 

416. But while we see, thus, what an ideal monarch might 
do for a people indolent, unambitious, sensual, by applying a 
portion of the wealth they created to ends more useful, ele- 
vating and satisfying than their individual tastes and appetites 
would have selected, we are forced also to remember how 
large a part of the wealth raised by taxation has, in all ages, 
been spent in war, pomp and folly ; how strong is the tempt- 
ation to extravagance and even to corruption in government 
expenditure ; how much of what the people pay the treasury 
does not receive ; how much of what the treasury disburses 
does not reach its intended object. These considerations are 
strong enough to justify, in a large degree if not wholly, that 
unwillingness to intrust to government the consumption of the 
wealth of the community, much beyond what is necessary to 
secure domestic tranquillity and the administration of justice 
between man and man, which is so peculiarly American. 

Yet it is possible that this feeling may be carried too far. 
When one contrasts the highways, the bridges, the streets, 
the harbors, the breakwaters, the lighthouses, and other aids 
to transportation and commerce, which government provides, 
with the best that could reasonably be looked for from indi- 
vidual or associated effort, without the taxing power ; when 
one contrasts our system of public education with the best 

tions of living are made easier there, as they would be by a remission of 
taxes, the consequences would not be an improvement in the well-being of 
the people, but an increase of their numbers. Our duty, therefore, as 
guardians and governors of the people, charged with the responsibility 
of keeping alive in times of famine a vast population with no reserved 
resources of its own, is to save for those who do not save for themselves, 
to keep a margin of income over expenditure so that we may have in 
hand a fund upon which to draw in the recurrent periods of distress. 
This is a leading principle in Indian finance. "Whoever forgets this neg- 
lects the primary duty of an Indian administrator." 



328 POLITICAL ECONOMY. 

that voluntary contributions or private munificence ever sup- 
plied ; when one contrasts the sanitary arrangements for sup- 
plying pure air and pure water to our crowded cities with the 
condition of things which exists where these matters are left 
to unofficial action ; he will find occasion to qualify in no 
small degree his assent to the proposition that, under a well- 
ordered constitution, government is only a policeman, to keep 
people from breaking each other's heads or picking each 
other's pockets. 



PART VI. — SOME APPLICATIONS OF 
ECONOMIC PRINCIPLES. 



It has seemed best to reserve to this portion of our work 
the discussion of some topics which involve the application of 
economic principles to questions of law or governmental pol- 
icy, into which considerations of political equity or political 
expediency will intrude themselves so that they can hardly be 
shut out ; and also to place here some matters of economic 
detail which might have unduly interrupted the course of our 
argument, had they been dealt with at the points with which 
they are logically connected. 

Throughout this part, therefore, I may be found to adduce 
considerations not strictly economic, with a freedom I have 
not allowed myself heretofore. 

The topics to be treated under this title are : 

1. Usury Laws. 

2. Industrial Co-operation. 

3. Political Money. 

4. Pauperism. 

5. The Doctrine of the Wage-Fund. 

6. The Multiple or Tabular Standard. 

7. Trade Unions and Strikes. 

8. The Knights of Labor. 

9. Attacks on the Doctrine of Rent. 

1 0. Nationalization of the Land. 

11. The Banking Functions. 

12. The National Banking System of the United States. 

13. Foreign Exchanges. 

14. Bi-Metallism. 



33° POLITICAL ECONOMY. 

15. The Revenue of the State. 

16. Taxation. 

1 7. " Protection " vs. Freedom of Production. 

18. Socialism. 

1. 

USUKT LAWS. 

471. The Prejudice against Taking Interest It has 

already been said (par. 36) that it is not the province of the 
economist to justify the existing order of things, or to estab- 
lish the morality or the political equity of laws or institu- 
tions affecting property ; yet we shall get so good a side-light 
upon the economic principles governing the loan of capital, 
in briefly considering the objections that have been raised, 
against interest, or the taking of usury, as it is invidiously 
called, that it may be worth our while to step out of the 
direct path for a moment, at this point. 

For many centuries, and even within a comparatively recent 
period, the Christian Church proscribed the taking of interest 
as a moral offense, and the laws of nearly all civilized coun- 
tries made it a crime, while the voice of publicists and of ethical 
writers, alike, was raised against it as a wicked and pernicious 
practice. Whence came this general consent in denouncing 
that which is to-day accepted as right in morals and as prac- 
tically beneficial, by all except a few fanatics ? 

The origin of the prejudice against usury is commonly 
attributed to a mistaken apprehension of a provision of the 
Mosaical Code forbidding the receipt of interest from any 
member of the chosen race, and to a passage in the works of 
Aristotle, those works which once had so profound and perva- 
sive an influence in forming the political philosophy of 
Europe, to the effect that as money does not produce money 
nothing more than the return of the principal sum lent can 
equitably be claimed by the lender. 

418. Does Money Produce Money P — Of the theological 
argument it is not necessary to say much here. The inhibition 



USURY LAWS. 331 

of usury, as between one Hebrew and another, was doubtless 
a feature in the general policy adopted for keeping the peculiar 
people apart from their profane neighbors and intensifying 
their community of feeling. The dictum of Aristotle, claim" 
ing no divine authority but professing to found itself on rea- 
son, remained unchallenged for ages amid all the political spec- 
ulations of Europe. Mr. McCulloch attributes to John Calvin 
the high honor of having first detected the fallacy of this 
argument against usury, discerning that, while money does not 
produce money, that which may be purchased with money does 
produce after its kind, and that herein is a perfect justification 
for the payment of interest. 

Money, does, indeed, not produce money, but capital pro- 
duce, capital. If a man borrows money he may with it buy grain 
which, when sown, will bring forth " some thirty, some sixty 
and some an h undred fold." He may purchase cattle, of which 
a small herd will in a few years become a mighty one. If he 
employs it in trade or in manufactures, his production may be so 
largely increased thereby that he may pay a liberal reward 
to the lender, and yet be better off than if he had not 
borrowed. 

407. The Movement Toward Reform.— England led the 
movement toward a more enlightened policy. By an act of 
1546 * lenders were allowed to receive interest, though at a 
rate not to exceed ten per cent. During a brief reaction under 
Edward VI. this law was repealed, but a statute of Elizabeth 
restored the right to take interest. Subsequent statutes re- 
duced the rate of legal interest successively to 8, 6 and 5 per 



* 37, Henry VIII. Though thus legalized, public sentiment and par- 
ticularly the opinions of the clergy remained in a high degree hostile to 
usury. " I do wish," said Dr. Wilson, in his Discourse upon Usury, pub- 
lished more than twenty years after the act of Henry VIII., " some penal 
law of death to be made against usurers, as well as against thieves and 
murderers, for that they deserve death much more than such men do ; 
for these usurers destroy and devour up, not only whole families, but 
also whole countries, and bring all folks to beggary that have to do with 
them." 



332 POLITICAL ECONOMY. 

cent. (Queen Anne), at which last point it remained till the 
present reign, when all restrictions on loans were abolished. 

Among the States of the American Union, Massachusetts 
has made contracts of loans as free as those of purchase and 
sale. 

Interest is now allowed to be paid on loans in all civilized 
countries, the prohibition of usury having fallen utterly out of 
the sympathies of this age. Money-lending, or the taking of 
interest when payment for goods or lands is forborne, has 
passed beyond all stigma ; and the profession of the banker, 
who organizes and conducts the borrowing and the lending of 
whole communities, is among the most honorable known to 
modern society. Yet there still survives an opinion, very 
widely spread, that the taking of interest should be under the 
regulation of the State, to prevent the abuses which are appre- 
hended from the power of the money-lender over the needy 
and necessitous borrower : that, to use Bacon's phrase, " the 
tooth of usury be grinded, that it bite not too much." 

This opinion finds expression in the statutes of nearly all na- 
tions and of almost every State of the American Union, and 
even the general banking law of the United States provides 
that the associations (National Banks) to be organized there- 
under may receive interest at the rate allowed by the laws of 
the State, Territory or District where they are located, and no 
more, and that, where no local rate is fixed by law, the rate of 
interest shall not exceed seven per cent., to be, however, taken 
in advance (discounted). 

420. Laws Regulating Interest.— All civilized nations hav 
ing legalized the taking of interest on loans, the term, usurj 
laws, as applied to existing legislation, has reference, not to- 
the prohibition of interest but to its regulation, generally 
through the means of a prescribed maximum rate which it is 
made unlawful to exceed. As has been stated, such laws still 
stand on the statute books of highly civilized states. What shall 
be said of them ? As a substitute for the laws that forbade 
the taking of interest they must be regarded as in the nature 
of enlightened legislation, and I am not sure that, even when 
considered without comparison with pre-existing legislation, 



USURY LAWS. 333 

these laws were, in an earlier time, wholly without justification. 
They were enacted in the interest of the would-be borrower, 
who was regarded as unable to sustain, without grave injury, 
which might also work injury to the community, the competi- 
tion to which he was subjected in his efforts to secure the loan 
of capital. And in the ages in which these laws were enacted, 
this assumption was not without reason. 

421. Usury Laws in Early Ages. — Borrowers were, then ? 
generally persons embarrassed or distressed, whether by their 
own fault or by misfortune. Trade and manufactures were 
not, as so largely now, carried on by means of borrowed capi- 
tal. The man who asked a loan was presumably in circum- 
stances which put him very much at the mercy of the money 
lender, just as a man in times of famine is at the mercy of the 
dealer in food, who may make unreasonable, extortionate and 
cruel terms. 

And the money lender in those days was not, in general, a 
nice sort of person. The recent outbreaks in Roumelia, Rou- 
mania and Russia testify to the natural feelings of a simple- 
minded, ignorant, passive, and more or less stupid people, who 
see houses and lands and cattle and goods and even standing 
crops pass with fatal certainty out of the hands of the many 
into the hands of a class in whom the faculty of acquisition is 
developed to such a degree as to make them, in comparison 
with a peasantry like that of the Slavonic States, as wolves 
among sheep. 

We allow all men to walk our streets indifferently, because 
men are so constituted physically as to be substantially equal, 
so far as contact is concerned. "We brush each other and 
sometimes run full against each other, and yet give and take 
no harm. But suppose one-half the people of our cities were 
as fragile and brittle as glass, while the other half, divided on 
the line of sex, or otherwise, were as heavy and as hard as 
iron, would not the law require the latter to go by separate 
streets, and protect the weaker part of the community from a 
contact that would be fatal ? 

I am not at all sure that economic reasons woidd not justify 
the legislature in interfering to save by any practicable means 



334 POLITICAL ECONOMY. 

one class in the community from the effects of such one-sided 
competition as existed between borrower and lender in the 
ages referred to ; nor am I sure that the kind of laws referred 
to were wholly without the beneficent effects they were 
intended to have. 

422. Evasion of Usury Laws. — Even in the ages when the 
taking of interest, in any form, was strictly prohibited under 
the most cruel penalties, usury laws were very frequently 
evaded, through a great variety of artifices and contrivances. 
In modern times, the laws prescribing a maximum rate of 
interest, generally under penalties of moderate severity, are, 
it may be said as a rule, violated or evaded, whenever the use 
of capital* becomes more valuable than the consideration 
allowed by law to be paid, be that five per cent., or six, or 
seven, or more. 

The most important means of evading the usury laws are 
the following : 

First. Fictitious Deposits in Bank. — Every successful mer- 
chant and manufacturer will, of course, keep a considerable 
deposit to his credit in the bank or banks with which he 
habitually deals. He will do this to protect himself against 
the failure of remittances from his own correspondents, to 
enable him to meet unanticipated demands, perhaps to take 
advantage of exceptionally good bargains suddenly offering. 

What we have now in mind is the keeping of deposits in 
bank, in excess of what the merchant or manufacturer would 
naturally maintain for his own purposes, as an inducement to 
the bank to loan him capital in emergencies.! Thus, we 

* The reader is referred to par. 286 for the demonstration that interest 
is paid for the use of capital, not always, not generally, not often, for the 
use of money, as such. In the present article, however, in writing of 
usury laws and the means of evading them, I shall use the phrases of the 
so-called Money Market, more properly the market for the loan of capi- 
tal ; and shall speak of money being scarce, money being worth such a 
per cent., etc., meaning always thereby, capital. 

f Samuel Jones Lloyd, afterwards Lord Overstone, in his testimony 
before the British Commons Committee of 1841, said : "The compensa- 
tion to the banker for his loss in advancing money upon discount, at a 



EVASION OF USURY LAWS. 335 

might suppose that a certain merchant or manufacturer finds 
it for his interest to keep " a line of deposits," in a certain 
bank, averaging twenty thousand dollars. This he might 
deem sufficient for all his own purposes. In order, however, 
to make sure that the hank will discount his notes when 
" money is scarce," he may think it worth while to maintain 
an average deposit of fifty thousand dollars. He gives the 
bank the use, all the time, of thirty thousand dollars, with the 
implied understanding that the bank, on its part, will loan 
him all it possibly can, in periods of financial difficulty. This 
course is pursued to a very great extent. It is natural that 
wealthy merchants and manufacturers should in this way pro- 
tect themselves against emergencies ; but this only makes it 
all the harder for those who can not afford to keep large 
deposits in ordinary times to borrow what they may absolutely 
require in periods of pressure or distress. 

Second. Commissions. — Suppose the law to prescribe that 
interest shall not be taken above six per cent, per annum. A 
merchant has occasion to borrow ten thousand dollars for two 
months. On this the maximum legal interest would be one 
hundred dollars. But the demand for capital, at the time, is 
so great, or the supply of it so small, owing to the prevalence 
of speculation or to the existence of commercial distrust, that 
no one is willing to lend ten thousand dollars, two months, for 
so little as one hundred dollars. Our merchant goes to a 
broker and says : " I wish to borrow so-and-so, and I will 
give you one per cent, for negotiating the loan." Now, one 
per cent, commission on ten thousand dollars is one hundred 
dollars : so that the would-be borrower really promises to 
pay at the rate of twelve per cent, per annum. Since he is in 
this frame of mind, there is no longer any difficulty about 
getting the loan. The probabilities are that the broker 
divides his commission with the lender. 

Third. Fictitious or " Dry " Exchange* — Let us suppose 

rate below its real value, would be found in the value of the accounts 
kept with him by the parties to whom such advances were made." 

*In his standard work on usury, Plowden states that " Dry Exchange ' 
was sometimes carried, in his day, to a very great extent. The borrower 



336 POLITICAL ECONOMY. 

the would-be borrower, in the case referred to, goes to his bank 
and offers his note for ten thousand dollars, payable in sixty 
days. The cashier says, " We can not discount this note ; but 
if you will make it payable in New York, we will try to put 
it through for you." This is done. At maturity, the note is 
paid in New York. The bank charges one-half per cent. 
" exchange," theoretically for bringing the money home, though 
it may be that the bank would at the time rather have its 
money in New York than in Boston. Now, one-half per cent, 
exchange on ten thousand dollars is fifty dollars, which is 
three per cent, on a loan of that amount for two months. This 
added to the six per cent, interest which the bank is author- 
ized to charge, makes nine per cent, received by the bank in 
this transaction. 

Both the first and the third of these modes of evading usury 
laws are completely within the law. A man has a right to 
keep as large deposits as he pleases in his bank ; the bank has 
a right to charge whatever rate of exchange may be mutually 
agreed upon for bringing money from a foreign country or a 
distant city. Dividing the commission between the broker 
and the lender is unlawful ; but it can be so easily and secretly 
done as to be practically beyond any danger of incurring 
penalties. 

Fourth. Loans for Unnecessarily Long Periods. — To illus- 
trate this mode of defeating the intention of usury laws, let us 
return to the case of the merchant, who, in time of commer" 
cial trouble, has occasion to borrow ten thousand dollars for 
two months. He offers his note for that amount, on that time, 
to a bill broker, who replies : " I can not get this discounted 
for you ; but, if you will make out your note for a year* I 

" draws " on an imaginary person in a foreign country. After the expir- 
ation of the time the bill is to run, comes a " protest " from that country 
for the non-payment of the bill, with the re-exchange of the money thence 
to the place where the money was drawn, the paper having, in fact, never 
been out of the country. " The borrower," says this writer, " being thus 
charged with exchange, re-exchange, protest and incidental expense, pays 
in all, Bome twenty or thirty per cent." 
*A witness before the Commons Committee of 1841. testified that he once 



EFFECTS OF USURY LAWS. 337 

will get you the money, at the legal rate." This is done. 
The lender sacrifices his chance of getting his eight or ten 
per cent, through some roundabout method, during two 
months, for the sake of placing his capital, at the maximum 
legal rate, for an entire year. He believes that the stringency 
in the market, which now makes " money " really worth eight 
or ten per cent, will soon be over. In that case, interest will 
probably fall below the legal rate ; perhaps during a greater 
part of the year capital may be "a drug," at three or four per 
cent. The lender may thus be better off in making the bor- 
rower pay six per cent, for twelve months, than if he had taken 
from him eight or ten per cent, for two months, to have his 
capital thrown back on his hands at the expiration of that time. 

423. Economic Effects of Laws Prescribing a Maximum 
Bate of Interest.— Such are the most important of the means 
resorted to for evading the laws establishing a maximum rate 
of interest. It must not be thought that, because usury laws 
may thus be evaded, they have, therefore, no economic effect. 
On the contrary, they exert a very considerable influence. 

(a.) These underhand or roundabout modes of doing busi- 
ness must cost somebody something. 

Now, the person on whom this charge is likely to rest is he 
who, in the time and place, occupies the position of relative 
economic disadvantage. This, it is needless to say, is, in 
times of financial trouble, the borrower, who must have the 
money or submit to great loss, perhaps to ruin. 

(b.) More important, still, among the effects of usury laws, 
is the destruction of an open market for the loan of capital, 
and the preventing of a quotable rate of interest. When the 
actual rate goes above the legal rate, and borrowers and 
lenders are driven to roundabout and underhand methods of 
making up the difference, nobody knows " what money is 
worth." The borrower, under a terrible necessity to secure 

negotiated in a period of stringency a loan of £100,000 to a mercantile 
house, for the term of seven years, although the borrowers only wanted 
the use of the capital for a few months, and would have been glad to take 
it for that time, at a high rate of interest, had this been permitted by the 
law. 



33% POLITICAL ECONOMY. 

a loan, lest his notes should " go to protest," and he be 
financially dishonored and perhaps ruined, is practically 
blindfolded, at the moment of his greatest weakness and need. 
The more anxious he is, the more completely is he at the 
mercy of the lenders, who, in such a case, have a common 
interest in creating the impression that "money" is very 
scarce and fast growing scarcer. Every borrower who becomes 
frightened spreads fear on every side around him, until per- 
chance a panic prevails, and borrowers submit to every degree 
of extortion. 

(c.) Even more important than the loss to the borrowing 
class through the most exorbitant rates of interest, is the sac- 
rifice of stocks of goods, securities, bonds, etc., to which many 
merchants are driven, in times of commercial distress, through 
the difficulties and delays interposed by the laws regulating 
the loan of capital.* Many a man in such a case, either 
because he has not the time to negotiate a loan by artifice, or 
because his credit is not of the best, or because he is driven to 
desperation, will sell goods consciously at a great disadvan- 
tage. Oftentimes, such a man has to submit to a sacrifice of 
five, ten, or fifteen per cent, of the value which the goods had 
a week before, and which they perhaps will have a month 
later. Now, to sacrifice only five per cent, on a body of 
goods, in order to get through one month of financial strin- 
gency, is equivalent to borrowing capital for that length of 
time, at the rate of sixty per cent., per annum ! How much 
more would it have been for this man's advantage, had the 
law permitted him to go into an open market for the loan of 
capital, and there pay whatever its use was, at the time, 
worth, were that nine, or twelve, or fifteen, or eighteen per 
cent. ! 

424. Usury Laws in Communities Mainly Non-Commer- 
cial. — We have spoken of the relations of the borrower to the 

* It is to this Lord Bacon alludes when he says, " Were it not for this 
easy borrowing upon interest, men's necessities would draw upon them a 
most sudden undoing, in that they would be forced to sell their means 
(be it lands or goods) far underfoot ; and so whereas usury doth but gnaw 
upon them, bad markets would swallow them quite up" 



EFFECTS OF USURY LAWS. 339 

lender of capital, in a primitive condition of industrial society, 
before business has come to be carried on by loans of capital, 
and while borrowers are generally distressed persons. We 
have, also, referred to the relations of the borrower and the 
lender, in communities having a high commercial and finan- 
cial organization. Intermediate between these two conditions 
is a state of society, such as characterizes extensive regions of 
the United States, to-day, where agriculture is prosperous, 
where industry has made some progress, yet where the com- 
munity still remains mainly non-commercial. This state of 
society is commonly left out of account by writers who oppose 
usury laws. I do not, however, deem it candid to omit com- 
munities of this character altogether from consideration, or to 
assume that conclusions which we may have drawn from the 
study of a highly advanced commercial society will apply to 
these, without qualification. 

On the whole, I do not think that the question of the 
effect of usury laws in a mainly agricultural community, in 
modern times, is quite so simple as most writers have treated 
it as being.* On the one hand, I have no doubt that the 
fixing of a legal rate of interest has a certain effect upon the 
disposition of owners of capital in lending that capital. We 
have seen (par. 147) that the moral and intellectual elements 
of supply and demand are very potential in exchange. I have 
no doubt whatever, that the current rate of interest, in a 
country where a rate is fixed by law, sometimes affords an 
example of the operation of this force. 

Again, I have no doubt that the influence of penalties 
threatened for exceeding a certain rate of interest, in a commun- 
ity chiefly non-commercial and of simple industrial organiza- 
tion and where the element of personal acquaintance largely 
enters into all relations of man with man, is distinctly felt in 
inducing some persons to accept the legal rate, if that be 

*"It is in vain," says John Locke, "to go about effectually to 
reduce the price of interest by a law ; and you may as rationally hope 
to set a fixed rate upon the hire of houses, or ships, as of money." And 
elsewhere this eminent philosopher calls a law to regulate the rate of 
interest " a law to hedge-in the cuckoo." 



34° POLITICAL ECONOMY. 

fixed tolerably near the ordinary market rate, so that the 
temptation to evade the law is not overwhelming. On the 
other hand, it is equally clear that such provisions of law may 
be evaded by the various means recited, and probably will be 
evaded whenever the inducement offered is very great ; and 
that, so far as borrowers are driven to shifts to disguise excess 
of usury, they are likely to find themselves worse off than 
they would be in an open market. 

Just where the balance would be, in such a community as 
has been described, so far as the interests of the ordinary 
agricultural borrower, or small country trader or mechanic, are 
concerned, I confess I do not feel confident ; and I doubt if 
any man knows enough to say rightly even to which side the 
balance might incline in a community composed of men 
of different race, or of different traditions and social habits, 
from those whom he has been accustomed personally to' 
observe. 

425. Usury Laws in Highly Commercial Communities. 
— But in any modern commercial community of large and 
varied and complicated industrial concerns, the case is a 
simple one. 

In an advanced state of industrial society, where borrow- 
ing is no longer the resort of the embarrassed and distressed, 
alone, or mainly, but, on the contrary, the most flourishing 
trade and manufactures are carried on chiefly by means of 
borrowed capital ; where, in the usual course of prosperous 
business, notes are made and are paid by the thousands, every 
day, usury laws become purely mischievous. 

First, because the vastly greater interests of trade and 
industry would properly outweigh, were society called to 
choose between them, the interests of distressed and embar- 
rassed individuals ; and, 

Secondly, because such persons will, in fact, benefit by the 
greater plentif ulness of capital, the greater ease of borrowing, 
and the consequently lower rate of interest, which, in general, 
result from freedom regarding contracts for loan. The 
business classes, active, alert, aggressive in competition, make 
rates of interest by which the less fortunate profit. 



WHA T IS CO-OPERA TION t 341 

II. 

INDUSTRIAL CO-OPERATION. 

427. The Objects of Co-operation.— In Part IV. we have 
shown the place in the scheme of distribution that is to be 
occupied by what is termed co-operation, should that project 
be, in any appreciable degree, realized. We said that the 
object of co-operation, in the technical sense in which that 
word has been used by economic writers, and even popularly 
used, since the Revolution of 1848, is to get rid of the " entre- 
preneur," or employer, as an industrial agent. 

It is evident that if the parties to production, other than the 
landlord, are to be thus reduced to two, that function may be 
performed either by the capitalist class or by the laboring class. 
The capitalists may, as such, become employers of labor : that 
is, each capitalist may become an employer because he is a capi- 
talist, and in the degree in which he possesses capital. Whereas, 
now, only a small fraction of the owners of capital are also 
employers of labor. In this case, interest and profits would 
be united. In the other case, the laborers may become self- 
employed, taking all the responsibilities of production, borrow- 
ing capital according to their occasions for its productive use, 
and paying a remuneration therefor on the principles here- 
tofore determined. In this case, wages and profits would be 
united. 

The latter is the change in industrial organization which is 
in contemplation when co-operation is urged. It is in the 
interest of the laboring classes, not of the owners of capital, 
that the employer is to be extruded from the industrial system 
and his profits brought to re-enforce wages. The whole signifi- 
cance of co-operation, as a scheme of industrial reform, lies in 
this : that the laboring classes expect to divide among themselves 
the large amount of wealth which they now see going, day 
by day, into the possession of their employers, as profits. 

427. Mistaken Conception of the Economists. — But, 
although tne laboring classes fully understand this, and know 



342 POLITICAL ECONOMY. 

precisely what co-operation, if effected, would mean to them, 
the political economists, unfortunately, by reason of that 
incomplete analysis of the productive agencies to which we 
have before adverted (par. 304), are unable to give an intelligi- 
ble, or even self-consistent account of co-operation. Not 
more than two or three English or American economists* have 
given a definition of co-operation which will bear examination. 
Why is this ? Because, having persistently refused to regard 
the function of the employer, they can not, consistently with 
their own analysis of production, give account of a scheme 
whose whole object is the elimination of that " functionary," 
as Prof. Rogers calls him. Yet, seeing, as they must, that 
co-operation really attempts something, and would, if effected, 
essentially change the existing organization of industry, they 
hit upon the utterly erroneous explanation that co-operation 
is to get rid of the capitalist ! Hardly an economist but 
blunders at this point. 

428. Prof. Cairnes's Statement.— Take a writer so justly 
celebrated for clearness of thinking as the late Prof. Cairnes. 
The frequency with which he has been quoted in these pages 
is evidence of the high respect in which his work is held by 
the writer. Yet Prof. Cairnes stumbles at the very threshold 
of the subject. " The characteristic feature of co-operation," 
he says, " looked at from the economic point of view, is that 
it combines in the same persons the two capacities of laborer 
and capitalist" 

Now, it is not at all of the essence of co-operation that the 
laborers should be capitalists ; that they should furnish any 
portion of the capital required for conducting the operations 
to be undertaken under this system. It is, of course, probable 
that some, perhaps most, of the co-operators would, in fact 
(though, as we have said, this is not of the essence of the 

*Prof. Thorold Rogers defines co-operation justly, as " a scheme . . . 
by which the laborer can unite the functions and earn the wages of laborer 
and employer, by superseding the necessity of using tlie services of the latter 
functionary." 

Prof. Amasa Walker had previously given expression to the same con- 
ception of co-operation. 



WHA T IS CO-OPERA TION ? 343 

scheme), own 6mall amounts of capital ; and the aggregate 
sum so held would be put into the co-operative business, and, by 
that amount, the sum to be borrowed of outsiders would be 
reduced. Yet, in order to secure justice between those co-op- 
erators who had and those who had not capital to put in the busi- 
ness, between those who had much and those who had little, 
it would be necessary that each associate who put capital into 
the business should be remunerated for his abstinence and for 
the risk of his principal, by a payment over and above 
what an associate contributing only through his labor would 
receive. 

In other words, the co-operative company would pay inter- 
est to its own members for the use of whatever capital they 
could command, and would borrow, on interest, the remaining 
capital required, just as the employer now does. The co-op- 
erative workmen who were so fortunate as to possess capital 
would lend it to their own company, instead of lending it, as 
now, through the agency of the bank or the savings institution, 
to employers of labor, perhaps to their own employers. 

Just so far as a laboring man joining a co-operative associa- 
tion had the courage and faith and self-control to save out of 
his earnings, he would become a capitalist, exactly as if he were 
not a co-operator. If, however, he chose to indulge himself 
by eating and drinking up all he earned, he would remain no 
capitalist, in spite of co-operation. Co-operation can not make 
a man a capitalist. Nothing can do that but saving, and while 
co-operation might, and doubtless would, encourage frugality, 
no scheme of man's devising is going to radically change 
man's nature so that a large proportion of the community will 
not consume all their incomes — be those incomes large or 
small. 

We see, thus, how erroneous is Prof. Cairnes's definition. 
The aim of co-operation is to get rid of the employer, and 
divide his profits among his former workmen, who are to 
become, for the future, self-employed: to organize themselves, 
in their own way, for industrial purposes, and carry forward 
production on their own account and at their own risk. 

429. The Benefits Aimed at by Co-operation.— Such being 



344 POLITICAL ECONOMY. 

the nature of co-operation, let us inquire what advantages 
might reasonably be looked for from it, provided it were found 
practicable. 

Let us begin by taking the laborer's point of view : 

First. To secure for the laboring class that large amount 
of wealth, which, as we have seen, goes annually in profits to 
the employer. 

Second. To secure for the laborer the opportunity to pro- 
duce independently of the will of an employer. Under the 
existing industrial system, it remains with the entrepreneur 
to decide, not only what shall be produced, and how and when 
and in what amounts, but also whether any production at 
all shall take place. 

It is true that the employer may, out of compassion, carry 
on production for a while where no profit to himself appears, 
rather than leave his working people to suffer. It is also true 
that his selfish interests may induce him to carry on produc- 
tion for a while, under similar conditions, in order to keep his 
customers from going to others. But neither of these consid- 
erations can be relied upon to any great extent or for any long 
period, nor can both together be relied upon at all as against 
the apprehension of considerable loss on the part of the 
employer. In a state of the market which causes the employer 
to doubt whether, after paying out large sums for materials 
and labor, he will get his money back in the price of the prod- 
ucts, a suspension of production to the extent of a third or a 
half is the most natural course for him to adopt. 

But while a body of laborers can not reasonably complain 
that their employer curtails production on the first intimation 
of commercial disorder or of diminishing demand, co-opera- 
tion would place it within their power to keep up production 
on their own responsibility, remaining at work and selling 
their product for what it would bring. It would no longer 
be the interest of the one employer, but that of the many 
workmen, which should decide whether production were to 
proceed or not. 

430. Co-operation from the Point of View of the General 
Economic Interest. — The foregoing are the two chief benefits 



ADVANTAGES OF CO-OPERATION. 345 

which the laboring class have looked to co-operation to secure 
for them. In addition to these, the political economist beholds 
in co-operation three sources of advantage. First : Co-opera- 
tion would, by the very terms of the case, do away with strikes. 
The employer disappearing, the workman becoming self-em- 
ployed, these destructive contests would disappear also. 
Second : The workman would be incited to greater industry 
and to greater carefulness in dealing with materials and with 
machinery. Third : In no small degree frugality would be 
encouraged. It can not be doubted that a co-operative laborer 
having the opportunity to invest his savings at once in his own 
business would feel a much stronger inducement to frugality 
than does the wage laborer. 

431. Co-operation, from a Still Higher Point of View. 
— We may leave to the moralist or the statesman the 
additional consideration that co-operation would clearly tend 
to improve the moral, social and political character of the 
workman, by giving him a larger stake in society, making his 
remuneration directly dependent on his own exertions, and 
admitting him to a participation in the deliberations and 
decisions of industry. 

432. The Difficulties of Co-operation.— The advantages 
which would attend the successful establishment of co-opera- 
tion being so many and so great, it may be asked why has 
this scheme, proposed so long ago, sanctioned by the highest 
economic authority, appealing directly to the self-interest of 
the laboring classes, advertised extensively in discussions 
relating to labor and wages, not been immediately successful, 
on a large scale ? How is it, that, on the contrary, co-opera- 
tion can hardly be said to have escaped failure, when one con- 
siders the great number of enterprises of this character which 
have been started and the few that have survived ? 

Co-operative enterprises may be divided into two classes — 
one attempting what we may call Productive co-operation : 
the other what we may call Consumptive * co-operation. In 
enterprises of the former class, the laborer seeks to make for 
himself an income ; in the latter he seeks to expend or consume 

* By many called Distributive. 



346 POLITICAL ECONOMY. 

that income to the best advantage : to make each dollar of his 
daily or weekly earnings go as far as possible in providing 
subsistence for himself and family. Of course, all the agen- 
cies of transportation and exchange are, as we have stated, 
productive ; yet in the difference of aim which has been 
shown to exist between the two classes of co-operative estab- 
lishments, is found the justification of the distinction indicated. 

433. Consumptive Co-operation has had no inconsiderable 
degree of success in England, in the way of shops for the 
sale of flour, meats, groceries and other articles of domestic 
consumption, at which subscribers or members of the associa- 
tions establishing such shops buy goods at, perhaps, the usual 
prices of retail trade, generally for cash, the profits of the 
year or the season, after deducting the expenses of supervision 
and management, being divided among the members, either 
equally or in the proportion of their purchases. 

In the United States, the indifference of the people, even of 
the poorer classes, towards small savings and that same unwill- 
ingness to take pains to secure a sound administration of 
trusts which has permitted municipal and State governments 
to fall so largely into the hands of unworthy persons, have 
combined to limit very narrowly the application of the scheme 
of consumptive co-operation. Here and there, "union" 
stores (the word store being used very generally in the United 
States in the sense in which the English use the word shop), 
" Granger " stores, or " Sovereigns of Industry " stores, fill a 
small place, generally for a brief period, in the general system 
of exchange ; but these have never become highly important 
agencies in our public economy. 

434. Productive Co-operation.— But while consumptive 
co-operation has had a degree of success which at least proves 
it to be a practicable scheme, given only a reasonable degree of 
popular interest in its maintenance, the history of productive 
co-operation alike in France, where it may be said to have 
originated, in England, and in the United States, has been of 
the most discouraging character. Of numberless enterprises 
undertaken within the last forty years by associations of 
laborers, with the encouragement and often the active assist- 



DIFFICULTIES OF CO-OPERATION. 347 

ance of philanthropists and political economists, and enjoying 
the benefit of a vast amount of gratuitous advertisement,* 
scarcely any remain. Mr. Frederick Harrison, reviewing the 
historv of co-operative enterprises in England, indicates the 
co-operative cotton mills as the only true instances of the 
application of this principle on any important scale. " Some 
of the mills," he says, " never got to work at all ; some took 
the simple form of joint-stock companies in few hands ; 
others passed into the hands of small capitalists, or the shares 
were concentrated among the promoters. In fact, there is 
now, I believe, no co-operative cotton mill, owned by working 
men, in active operation, on any scale, with the notable 
exception of Rochdale." 

" Here and there," Mr. Harrison continues, " an association 
of bootmakers, hatters, painters or gilders, is carried on, upon 
a small scale, with varying success. But small bodies of 
handicraftsmen (or, rather, artists), working in common, with 
moderate capital, plant and premises, obviously establish 
nothing." 

435. The Difficulties of Productive Co-operation. — 
With such a statement, from a distinguished labor champion, 
we repeat our inquiry, Why is it that co-operation, in the 
view of the many and great advantages which it offers, has 
had such partial and doubtful success ? The answer is at 
hand. The difficulties of productive co-operation are directly 
as its advantages. The arbitrary powers wielded and the vast 
profits enjoyed by the employing class make the working 
classes desire, naturally enough, to bring about an industrial 
order in which they shall no longer be subject to such exercise 
of authority, and in which they shall themselves reap the large 
sums of wealth which they see passing into the hands of their 
employers. Yet when a body of laborers set up for themselves, 



* Within the last three or four years, a fresh crop of co-operative 
enterprises has sprung up, especially in the United States. Time 
has not yet served to determine the question of success or failure. The 
fullest accounts of these enterprises will be found in the publications of the 
American Economic Association. 



34§ POLITICAL ECONOMY. 

the result very soon shows that the reason why the employer 
wields such despotic power and enjoys such large revenues, 
is that he performs a part in modern industrial society which 
is of supreme importance, in which any thing less than the 
highest abilities of organization and administration involve 
comparative, if not absolute, failure. 

The time may come, when a body of laborers, joined 
together for the purpose of co-operative production, will give 
as intelligent a direction, as close a supervision, as rigid a dis- 
cipline, as energetic an impulse, as the present successful man 
of business gives to the enterprises on which his fortunes and 
his reputation are staked ; but, for one, though believing thor- 
oughly so far as politics are concerned, in a government of the 
people, by the people, for the people, I see nothing which indi- 
cates that, within any near future, industry is to become less des- 
potic than it now is. The power of the master in production, 
" the captain of industry," has steadily increased throughout 
the present century, with the increasing complexity of com- 
mercial relations, with the greater concentration of capital, 
with improvements in apparatus and machinery, with the multi- 
plication of styles and fashions, with the localization and 
specialization of manufactures. 

436. I shall be heartily glad to see the working classes rise 
to the height of the occasion, and vindicate their right to rule 
in industry by showing their power to do it. But meanwhile 
it must be distinctly understood, that nothing costs the work- 
ing classes so much as the bad or commonplace conduct of 
business; that industry must be energetically, economically, 
and wisely managed, no matter who is to do it ; and that co-op- 
eration will be successful only as it results in the production 
of equally good articles, at equally low prices, as those produced 
under entrepreneur management. 

If we have made our analysis of profits correctly, it appears 
(par. 312) that the gains of the employer are not taken from 
the earnings of the laboring class, but measure the difference 
in production between the commonplace or bad, and the able, 
and shrewd, and strong management of business. "When asso- 
ciated laborers are able to manage business as ably, strongly 



PROFIT-SHARING. 349 

and shrewdly as private employers, they can dismiss the entre- 
preneur, and keep his gains themselves. 

437. A Possible Field for Industrial Co-operation.— I 
have spoken thus strongly of the difficulties of productive 
co-operation, because I believe that only harm will come to 
the interests of the working classes from slurring over those 
difficulties, as is so often, with the best intentions, done by 
writers on economics. In speaking thus, however, of the evil 
liabilities which beset such enterprises, I have reference to 
industry as a whole, and especially to its larger branches, 
which supply general markets, and which are subject to com- 
petition at once far-reaching and searching. In the last sen- 
tence quoted from Mr. Frederick Harrison, we find indicated 
the outlines of a possible field of co-operation, within which 
most of the difficulties which attend such enterprises on a 
larger scale, are not encountered, or are encountered in 
greatly diminished force. Where (1) a branch of industry 
is of such a nature that it can best be carried on by a small 
group of workmen ; where (2) the workmen so engaged are 
substantially on a level as regards strength and skill ; where 
(3) the initial expenditure for tools and materials is small, 
and, especially, where (4) the goods are to be produced 
mainly or wholly for the local market, the difficulties of the 
co-operative system sink to a minimum and the advantages 
rise to a maximum. It is in such branches of industry, there- 
fore, that the experiment of productive co-operation should 
first be tried. Success can be achieved here, if anywhere. 
Should success be here achieved, advantage may be taken of 
the experience thus accumulated and of the training thus 
acquired, to undertake progressively larger enterprises. On 
the other hand, should the difficulties of productive co-opera- 
tion prevent a decided success within the nearer and easier 
field, it would be worse than futile to attempt to inaugurate 
that system on a more ambitious scale. 

438. Profit-Sharing — The obstacles which beset produc- 
tive co-operation are not those which are encountered by the 
scheme of Profit-Sharing, which has been highly recommended 
by many writers and which has been undertaken of late years, 



35° POLITICAL ECONOMY. 

not, indeed, on a large scale, but in numerous instances. The 
advantages of this scheme, illustrated by many examples of 
at least partial and temporary success, will be found stated in 
the work under the title, Profit-Sharing, by Mr. Sedley 
Taylor. Fresh literature on the subject is now almost daily 
appearing in newspapers, magazines, pamphlets and official 
reports. The matter is one of economic and administrative 
detail, too minute to be treated in an elementary work of this 
character. 

The object sought is to interest workmen in increasing 
production and in reducing waste and breakage, through a 
payment to them of a portion of the employer's profits. It 
is, also, held that this system would have the effect to promote 
good feeling between master and man, and to diminish the 
resort to strikes and labor contests, although, in fact, it has 
not always served, when tried, to prevent the workmen con- 
cerned from joining others of the same trade when such 
contests have once begun. 

The difficulties of profit-sharing are found (1) in the small- 
ness of the amount which can thus be distributed among the 
workmen, without unduly diminishing the employer's interest 
in production ; (2) in the suspicions likely to arise regarding 
the employer's good faith in declaring the amount thus subject 
to distribution, unless the workmen, or a committee of them, 
are to be allowed such access to the employer's books and 
accounts as few business men would willingly concede, and (3) 
in the perplexing question, what shall be done, under such a 
system, in the not infrequent cases where the employer 
realizes, not a profit, but a loss. 

The last of these difficulties is, perhaps, the greatest. The 
employer is, not unnaturally, disposed to hold that, if the 
workmen share in his gains, they should also share in his 
losses ; or, at least, that his gains and losses, through a con- 
siderable period of time, should be set off against each other, 
and that only the balance of gain for such a period should be 
subject to the rule of distribution. Such a postponement of 
the dividend, however, taken in connection with the smallnesa 
of the amount which, at the most, could thus be divided, 



INCONVERTIBLE PAPER MONEY. 35 * 

would reduce the interest of the workmen in the system, to 
such an extent as to practically deprive the arrangement of 
nearly all influence over their actions, if it did not lead to its 
early abandonment. 

III. 

POLITICAL MONEY. 

439. Inconvertible Paper Money is, by Distinction, 
Political Money. — In all modern societies, money is at once an 
economic agent and a political institution. The selection by the 
State of a money metal, the adoption of denominations and 
devices for its coinage, the establishment of a standard of purity 
in the coin, and the conferring of the legal-tender property 
upon the money pieces so formed, are acts of legislation or 
administration which give to all forms of money with which 
we are familiar something of a political character. 

But there is one kind of money which owes its existence 
and acceptance as the common medium of exchange so com- 
pletely to legislation or to the act of the ruler, that it may be 
called, by eminence, political money. This is the inconvert- 
ible paper monej 7 - of which we wrote in Chapter 5, Part III. 
In comparison herewith, the other forms of money known to 
modern commerce may be regarded as having so little of a 
political character as to justify their being called economic 
money. 

The essential difference between what we here call econo- 
mic and what we call political money, is that the supply of 
the former, under free coinage, is limited by natural conditions 
of production, while the supply of the latter is released from 
all such conditions, and is made to depend upon law or the will 
of the ruler. It requires more labor, in general twice as much 
labor, to raise two thousand ounces of gold or silver from the 
mine as to raise one thousand ounces, to be coined into money; 
but it costs no more labor to print two million dollars of 
paper money, or ten millions, or fifty, than to print one mil- 
lion. To multiply the amount of such money, it is only nec- 
essary to print the word fifty, or ten, or two, instead of the 
word one. 



352 POLITICAL ECONOMY. 

By some, this capability of increase at will, independently of 
the expenditure of labor or capital, has been regarded as a 
prime advantage, and such money has been denominated by 
these advocates of government issues, political money, — that 
character being attributed to it as meritorious. It is, then, 
from the friends of such money that I borrow the term. 
Accepting the challenge contained in this title, let us proceed 
to inquire further regarding government paper money, apply- 
ing to it the test to which all political institutions and arrange- 
ments are rightly subjected. 

440. The Favorable Possibilities of Political Money.— 
I have already, with a frankness that has, on other occasions, 
been severely blamed, admitted that government paper money 
may, for a time at least, irrespective of redemption, pass in 
circulation without depreciation ; performing perfectly the 
function of a medium of exchange, registering the comparative 
values of the several commodities in the market with all the 
facility and accuracy that could be desired, and serving as a 
standard of deferred payments well or ill according as its own 
amount is regulated. Prof. Jevons states that between 1789 
and 1809 the value of gold fell 46 per cent.; that from 1809 to 
1849 it rose 145 per cent.; while between 1849 and 1874 it fell 
at least 20 per cent. It is certainly conceivable that paper 
money might be so regulated in amount as to fluctuate less in 
value than did gold during the eighty-five years covered by 
Prof. Jevons' computation. 

441. The Liability to Evil Inhering in Political Money. 
— In the case of every proposed political institution or arrange- 
ment, however, we are bound to investigate, not its possibili- 
ties only, but also its probabilities. It is not enough to show 
that it might conceivably be so established and maintained as 
to yield results of good. It must also appear that its success- 
ful working does not depend upon an exercise of prudence, 
virtue and self control, beyond what is reasonably and fairly 
to be expected of men in masses, and of rulers and legislators as 
we find them ; and the consequences of its possible perversion or 
abuse must be weighed against the advantages which might 
be derived from its legitimate application and employment. 



POLITICAL MONEY. 353 

Paper money, then, as a political institution or arrangement, 
must submit to this test. The man who advocates govern- 
ment issues, without being prepared to show reasonable 
ground for believing that they will not be so abused as to 
accomplish more of evil than of benefit, is not entitled to be 
listened to. After the experiences of the past hundred years 
intelligent men rightly refuse to take the trouble even to dis- 
cuss political schemes which assume an impossible virtue, or 
which disregard the actual conditions under which alone they 
could be set to work. 

In the case of government paper money the liability to abuse 
is found in the tendency to over-issue ; to this end the fiscal 
exigencies of government (par. 444) are likely to combine 
with a popular craving (par. 445) for a money of diminishing 
value. 

We have already (par. 220) shown that the smallest degree 
of depreciation, even, as Mr. Bagehot says, the mere liability 
to depreciation without its reality, may unsettle the exchanges 
between the paper money country and those with which it 
trades, in a degree to work very injurious effects. But what 
we have here to consider is the liability to extensive over- 
issues, with an altogether new series of consequences to trade 
and industry. 

442. Two Motives Operating to Produce Expansion.— 
This liability arises from the fact that, where the principle of 
inconvertible paper has once been adopted, two powerful 
motives tend to produce expansion, with no adequate restrain- 
ing force in operation. When once the traditional fear of 
paper money is worn off, the only safeguard against over-issue 
is found in far-reaching, conscientious, disinterested and cour- 
ageous statesmanship. All the selfish interests that make 
themselves felt, all the passions of the hour and the appetites 
that clamor for indulgence, favor expansion. There is an 
unremitting pressure on that side, which now and then rises to 
furious impulses against the frail barrier that withstands 
inflation. 

How far is it wise for any moderate advantage to call into 
being forces which are only to be kept from becoming in the 



354 POLITICAL ECONOMY. 

highest degree destructive by being constantly watched and 
unremittingly opposed ? Is it good policy— is it consistent 
with ordinary common sense — to invoke, for the accomplish- 
ment of a definite and at the best not considerable good, 
agencies respecting which it is confessed that the least relaxa- 
tion of vigilance, a momentary indulgence of human weakness, 
one false motion, will lead to serious, perhaps irreparable 
disaster ? 

443. Time no Safeguard — Nor does the liability to over- 
issue diminish with the lapse of time. Moderation in the 
issue of government paper money does not form a political 
habit which becomes a security against abuse. On the con- 
trary, the longer the regime of inconvertible paper money 
lasts, the greater the danger. The popular mind becomes 
accustomed to the sight and the thought of it ; the fear of it 
is worn off ; a generation comes upon the stage that has not 
known metallic money, or bank money convertible into coin 
on demand. 

In 1690, the Colony of Massachusetts issued paper money 
to pay the charges of the disastrous expedition of Sir Wm. 
Phipps. At first, over-issue took place and depreciation set 
in ; but by prompt action the excess was called in and 
redeemed, and the notes brought to par, They so remained 
for nearly twenty years. When, however, in 1710, the 
second expedition against Canada took place, the colony fell, 
without an apparent struggle, into the gulf of irredeemable 
paper ; the money of Massachusetts became a weltering 
chaos ; trade was brought into the utmost confusion ; pro- 
duction to the utmost weakness. From this miserable condi- 
tion the colony did not emerge for nearly forty years, till, 
in 1749, the paper was bought up at 11 : 1 in silver and burned. 

Russia first issued paper money in 1768, and for nearly 
twenty years kept her notes at par, only to fall at the end of 
that period into an abyss of discredit and depreciation from 
which her trade and finances have not yet recovered. 

Twice since the Revolution of 1848 Austria has stood on the 
very verge of specie payments, only to be thrown backward 
into insolvency by the imminence of war. 



POLITICAL MONEY. 355 

The danger of over-issue never ceases to threaten inconvert- 
ible paper money. The path winds along the edge of a preci- 
pice. Vigilance can not for a moment be relaxed. The pru- 
dence and self-restraint of years count for nothing against any 
new onset of popular passion or in the face of a sudden exi- 
gency of government. 

444. The Fiscal Motive. — The exigencies of the public 
treasury constitute, perhaps, the most formidable of the two 
dangers which menace the integrity of a paper money circula- 
tion. 

" Real money," said Edmund Burke, " can hardly ever mul- 
tiply too much in any country, because it will always, as it 
increases, be a certain sign of the increase of trade, of which 
it is the measure, and consequently of the soundness and vigor 
of the whole body. But this paper money may and does 
increase, without any increase of trade, nay, often when trade 
greatly declines, for it is not the measure of the trade of the 
nation, but of the necessity of the government. It is absurd 
and must be ruinous, that the same cause which naturally 
exhausts the wealth of a nation should likewise be the only 
productive cause of money."* 

The two most marked instances of continence in the issue 
of irredeemable paper are those afforded by the Bank of 
England during the period of the Restriction, and by the Bank 
of France in 1848, and again in 1871. No one can question 
that the prudence and self-restraint here shown were due 
mainly to the fact that, in neither case, would the profit of 
fresh issues have inured to the benefit of the government. 
At the same time, it would not be candid to omit to mention 
the loyal observance by the Congress of the United States of 
the pledge it gave the country in 1864, that the greenbacks 
should not exceed $400,000,000. 

* In the same vein, Alexander Hamilton: "In great and trying 
emergencies there is almost a moral certainty of its becoming mischiev- 
ous. The stamping of paper is an operation so much easier than the 
levying of taxes, that a government in the practice of paper emissions 
would rarely fail to indulge itself too far in the employment of this 



35 6 POLITICAL ECONOMY. 

445. Scaling Down Debts.— In all free governments, or 
governments much subject to popular impulses, a second 
danger of over-issue arises from the appetite which is 
engendered in the masses of the people for further emissions 
for the purpose of scaling down debts, " making trade good," 
and enabling works of construction and extensive public 
improvements to be undertaken, for which taxation could not 
easily provide the means. 

The intrusion of the debtor class into the legislature with 
their impudent demands for issues to scale down debts is a 
familiar spectacle. Even the sterling virtue of early New 
England did not save those primitive communities from the 
fiercest impulses of political dishonesty, when once the paper 
money passion had been aroused. " Parties," says the his- 
torian Douglass, " were no longer Whigs and Tories, but 
creditors and debtors. Governors were elected and turned 
out as the different interests happened to prevail." 

The same feature appeared early in the history of the 
French Revolutionary paper money. We have seen it in our 
own country during the present generation, an active, aggres- 
sive, vehement, virulent force, engendered by the desire of 
paying debts, wiping off scores, raising mortgages, in depreci- 
ated money. 

Paying debts is always a disagreeable necessity. For one 
man who would steal to acquire property, in the first instance, 
a score will do that which is no better than stealing, in order 
to retain property which has passed into their hands and 
which they have come to look upon as theirs, though not paid 
for. 

It is the view of not a few sound economists * that a grad- 

* Thus M. Chevalier says : " Such a change will benefit those who 
live by current labor : it will injure those who live upon the fruits of 
past labor, whether their fathers' or their own. In this it will work in 
the same direction with most of the developments which are brought 
about by that great law of civilization to which we give the noble name 
of progress." 

And Mr. J. R. McCulloch declares that " though, like a fall of rain after 
a long course of dry weather, it may be prejudicial to certain classes, it 



PAUPERISM. 357 

ually progressive depreciation of metallic money, from age to 
age, might be advantageous to society as a whole, both 
relieving industry in some measure from the weight of bur- 
dens derived from the past, and giving a certain fillip to indus- 
trial enterprise. 

But here the injury to the creditor class is not the work of 
man, but of God ; like the death of a miserly bad man which 
brings his wealth into the hands of a generous, philanthropic, 
public-spirited heir, at which change of ownership men may 
properly rejoice. But had the heir procured the death of the 
miser, the aspect of the case would have been entirely differ- 
ent. No plea of public spirit or benevolence in the disposition 
of the wealth could compensate society for that deep and 
damning wrong. 

A reduction in the burden of obligations, accomplished by 
the act of a legislature, in the issue of paper for the purpose 
of enabling the debtor to pay in a depreciated money, has no 
virtue in it to promote industry or encourage enterprise. It 
carries with it the sting of injustice and fraud. It draws 
after it retributive agencies which curse the people and 
the age. Having reference exclusively to economic interests, 
we may confidently say that the man who advocates the 
scaling down of debts, for the sake of encouraging trade and 
production, shows himself so ignorant of history as to be a 
wholly unfit adviser as to the present and the future. 

IV. 

PAUPERISM. 

446. The Impotent vs. the Abie-Bodied Poor.— The 

relief of the impotent poor, whether by private or by public 
charity, is, so far as political economy is concerned with it, a 
question relating to the consumption of wealth. It is so 
much a matter of course, under our modern civilization, that 
the very young and the very old, the crippled and deformed, 

is beneficial to an incomparably greater number, including all who are 
actively engaged in industrial pursuits, and is, speaking generally, of 
great public or national advantage." 



35& POLITICAL ECONOMY. 

who are unable to earn their own maintenance, shall not be 
allowed to starve, that the matter of relief to these classes 
becomes one of administrative detail, that does not require 
even to be alluded to in an elementary treatise on economics. 
The experience of that country from which we derive our law 
and much of our administrative machinery, is, however, so 
instructive as to the influence for mischief upon the entire 
laboring population and upon the future production of wealth, 
that may be wrought by ill considered provisions for the dis- 
tribution of alms to the able-bodied poor, as to make it worth 
while briefly to recite that experience here ; and thereupon to 
define the limits outside which the consumption of wealth for 
this purpose becomes prejudicial. 

We shall get at our subject most directly by inquiring, why 
is it that the laborer works at all. Clearly that he may eat. 
If he may eat without it, he will not work. The neglect 
or contempt of this very obvious truth by the British Parlia- 
ment, during the latter part of the eighteenth and the early 
part of the nineteenth century, brought the working classes 
of the kingdom almost to the verge of ruin, created a vast 
body of hopeless and hereditary pauperism, and engendered 
vices in the industrial system which have been productive of 
evil down to the present day. 

447. Establishment of the English Pauper System.— 
By statute of the 27th year of Henry VIII., the giving of 
alms was prohibited, and collections for the impotent poor 
were required to be made in each parish. By 1st Edward VI., 
bishops were authorized to proceed at law against persons 
who should refuse to contribute for this purpose, or should 
dissuade others from contributing. By 5th Elizabeth, 
Justices of the Peace were made judges of what constituted a 
reasonable contribution. By 14th Elizabeth, regular com- 
pulsory contributions were exacted. But the act of 43d 
Elizabeth created the permanent pauper system of England. 

The increasing necessity for legal provisions for the poor, 
during the period covered by this recital, is attributed by 
judicious writers, first, to the destruction of the abbeys and 
monasteries, which had, in earlier times, disbursed vast rev- 



THE WORKHOUSE TEST. 359 

enues in charity ; and, secondly, to the effects of the flood of 
new silver from the mines of Spanish America, which, hy 
rapidly raising prices and thus reducing the purchasing 
power of fixed incomes, had caused large numbers to be 
thrown out of employment. 

By the act of 43d Elizabeth, every person in the kingdom 
was given a legal right to public relief, if required ; but volun- 
tary pauperism was severely dealt with, and the able-bodied 
were compelled to work. At first, the body of inhabitants 
were to be taxed for the objects of this statute ; but subse- 
quent legislation threw the burden entirely upon the landowners, 
where it remains to this day, with the exception that partial 
grants are now made out of the Imperial revenues to meet 
the charges of maintaining certain classes of paupers, such as 
the insane. 

448. Removal of the Workhouse Test. — The principle of 
requiring the able-bodied poor to work continued for genera- 
tions to be fundamental in the English pauper system ; and 
for the better enforcement of this requisition parishes or unions 
of parishes were, by an act of 9th George L, authorized to build 
workhouses, residence in which might be made a condition of 
relief. Moreover, from the days of Elizabeth to that of George 
III., the spirit which actuated the administration of the poor 
laws was jealous and severe. Doubtless in that administration 
unnecessary harshness was sometimes practiced ; but, on the 
whole, the effect on the working classes was wholesome, for it 
was made undesirable to become a pauper. 

On the accession of George III., a different theory came to 
direct legislation relating to poor relief, and a widely differ- 
ent temper of administration began to prevail. Six successive 
acts, passed in the first years of that reign, intimated the 
changed spirit in which pauperism was thereafter to be dealt 
with. In the 22nd year of George III., the act known as Gil- 
bert's act gave a fuller expression to this spirit. By that act 
the workhouse was no longer to be used as a test of voluntary 
pauperism : the 29th section provided that "no person shall be 
sent to such poor-house except such as are become indigent by 
old age, sickness or infirmities, and are unable to acquire a 



360 POLITICAL ECONOMY. 

maintenance by their labor ; except such orphan children as 
shall be sent thither by order of the guardian or guardians 
of the poor, with the approbation of the visitor, and except 
such children as shall necessarily go with their mothers thither 
for sustenance." 

With respect to the rest of the poor, the act by its 32d sec- 
tion provided " That where there shall be in any parish, town- 
ship or place, any poor person or persons, who shall be able 
and willing to work but who can not get employment, the 
guardian of the poor of such parish, etc., on application made 
to him by or on behalf of such poor person, is required to 
agree for the labor of such poor person or persons at any work 
or employment suited to his or her strength and capacity, in 
any parish or place near the place of his or her residence, and 
to maintain, or cause such person or persons to be properly 
maintained, lodged and provided for, until such employment 
shall be procured, and during the time of such work, and to 
receive the money to be earned by such work or labor, and apply 
it in such maintenance as far as the same will go, and make 
up the deficiency, if any" 

By the repeal of the workhouse test, and by the additional 
most injudicious provision which we have placed in italics, 
a deadly blow was struck at the manhood and industrial self- 
sufficiency of the working classes of England. 

449. " The act," says Sir George Nicholls, in his History of 
the English Poor Law, " appears to assume that there can 
never be a lack of profitable employment, and it makes the 
guardian of the parish answerable for finding it near tbe labor- 
er's own residence, where, if it existed at all, the laborer might 
surely, by due diligence, find it himself. But why, it may be 
asked, should he use such diligence when the guardian is bound 
to find it for him, and take the whole responsibility of bargain- 
ing for wages and making up to him all deficiency ? He is 
certain of employment. He is certain of receiving, either 
from the parish or his employer, sufficient for the maintenance 
of himself and his family ; and if he earns a surplus, he is cer- 
tain of its being paid over to him. There may be uncertainty 
with others, and in other occupations. The farmer, the lawyer, 



PAUPERISM. 3 6t 

the merchant, the manufacturer, however industrious and obser- 
vant, may labor under uncertainties in their several callings ; 
not so the laborer. He bears, as it were, a charmed life in this 
respect, and is made secure, and that, too, without the exercise 
of care or forethought. Could a more certain way be devised 
for lowering character, destroying self-reliance, and discour- 
aging, if not absolutely preventing, improvement '? " 

450. The Logical Outcome. — By 1832 the false and vicious 
principle on which Gilbert's act was based had been carried 
loo-ically out to its limits in almost universal pauperism. The 
condition of the person who threw himself flat upon public 
charity was better than that of the laborer who struggled on 
to preserve his manhood in self-support. The commissioners 
appointed in that year to investigate the workings of the poor 
law, found that, where the independent laborer was able to 
earn by his week's work but 122 ounces of solid food, the pau- 
per had 151 ounces given him in idleness. The former had 
only to abandon his effort to provide for himself, to be better 
provided for than was possible through his own exertions. 
The drone was better clothed, better lodged and better fed 
than the worker. 

All the incidents of this bad system were unnecessarily bad. 
The allowance for each additional child was so much out of 
proportion to the allowance for adults, that the more numer- 
ous a man's children the better his condition, and thus the 
rapid increase of an already pauperized population was encour- 
aged. Moreover, the allowance in the case of illegitimate chil- 
dren was even greater than for those born in wedlock. The 
British Parliament had turned itself into a society for the pro- 
motion of vice. " The English law," said Commissioner Cow- 
ell, in his report, " has abolished female chastity." " In many 
rural districts," writes Miss Martineau in her History of the 
Peace, " it was scarcely possible to meet a young woman who 
was respectable, so tempting was the parish allowance for 
infants in a time of great pressure." " It may safely be 
affirmed," said the Poor Law Commissioners of 1831, "that 
the virtue of female chastity does not exist among the lower 
orders of England, except to a certain degree among domestic 



362 POLITICAL ECONOMY. 

servants, who know that they hold their situations by that 
tenure and are more prudent in consequence." 

Such may be the effects of foolish laws. The legisla- 
tor MAY THINK IT HARD THAT HIS POWER FOR GOOD IS SO 
CLOSELY RESTRICTED ; BUT HE HAS NO REASON TO COMPLAIN 
OF ANY LIMITS UPON HIS POWER FOR EVIL. On THE CON" 
TRARY, IT WOULD SEEM THAT THERE IS NO RACE OF MEN, WHOM 
A FEW LAWS RESPECTING INDUSTRY, TRADE AND FINANCE, 
PASSED BY COUNTRY SQUIRES OR LABOR DEMAGOGUES, IN 
DEFIANCE OF ECONOMIC PRINCIPLES, COULD NOT IN HALF A 
GENERATION TRANSFORM INTO BEASTS. 

451. Poor Law Keform.— We have seen what a system the 
English squirearchy substituted for the economic law that he 
that would eat must work. The natural effects of this system 
were wrought speedily and effectually. The disposition to 
labor was cut up by the roots ; all restraints upon increase of 
population disappeared under a premium upon births ; self- 
respect and social decency vanished before a money-premium 
on bastardy. The amount expended in the relief and main- 
tenance of the poor rose to enormous and even ruinous sums. 
In some instances landowners relinquished their estates in 
order to escape the monstrous rates levied upon them, in sup- 
port of local paupers. 

In this exigency, which, in truth, constituted one of the 
gravest crises of English history, Parliament, by the Poor 
Law Amendment Act (4th and 5th, William IV.) returned 
to the principle of the act of Elizabeth. The workhouse test 
was restored ; allowances in aid of wages were abolished ; paid 
overseers were appointed, and a central system was created 
for the due supervision of the system. Illegitimacy was dis- 
couraged by punishing the father, instead of rewarding the 
mother ; and the law of pauper settlement* was modified so as 
to facilitate the migration of laborers in search of employ- 
ment. 

* The law of parochial settlement was enacted in the reign of Charles 
II. While other restrictions upon the movements of population grad- 
ually gave way, during the two centuries following, before the expan. 
sion of industrial enterprise and the liberalizing tendencies of modern 



PA UPERISM. 363 

By this great legislative reform the burden of pauperism, 
in spite of the continuing effects of the old evil system, was 
reduced in three years, by an average amount, the kingdom 
over, of forty-five per cent. 

452. The Principle that Should Govern Poor Relief.— 
The moral of this episode in the industrial history of England 
is easily drawn. It is of the highest consequence that 
pauperism shall not be made inviting ; that, on the contrary, 
the laborer shall be stimulated to the utmost possible exertions 
to achieve self-support, only accepting relief as an alternative 
to actual starvation. It is not, to this end, necessary that any 
brutality of administration shall deter the worthy poor who 
have no other recourse ; but, it should be the prime object of 
legislation to make the situation of the pauper less agreeable 
than that of the independent laborer, and that, by no small 
interval. The workhouse test for all the able-bodied poor, 
and genuine hard work, up to the limit of strength, are 
imperatively demanded by the interests of productive labor. 
Wherever there is a possible choice between self-support and 
public support, the inclination to labor for one's own subsis- 
tence should be quickened by something of a penalty upon 
the pauper condition, though not in the way of cruelty or 
positive privation. "All," says Mr. Geo. W. Hastings, "who 
have administered the Poor Law must know the fatal readi- 
ness with which those hovering on the brink of pauperism 
believe that they can not earn a living, and the marvelous 
way in which, if the test be firmly applied, the means of sub- 
sistence will be found somehow." 



thought, the mischievous tendencies of the Law of Settlement were given 
a wider scope and an increased severity, from reign to reign. Migration 
within the Kingdom was practically prohibited. If the laborer, in search 
of employment crossed the boundaries of that one of the fifteen thou- 
sand parishes of England in which he belonged, he was liable to be appre- 
hended and returned to the place of his settlement. Parish officers were 
perpetually incited by the fears of the rate-payers to the utmost zeal in 
hunting down and running out all possible claimants for public charity, 
on whom, if unmolested, residence would confer a right to support. 
" Where," says Prof. Rogers, "an employer wished to engage a servant 



364 POLITICAL ECONOMY. 

V. 

THE DOCTRINE OF THE WAGE-FUND. 

453. The Doctrine Stated. — In opening the subject of 
Wages, I passed by without discussion the once generally 
received doctrine — generally received, that is, in England and 
America — of a fund set apart for the payment of wages, and 
proceeded at once to state affirmatively the views I hold 
regarding the laborer's share in the product of industry. 

Inasmuch, however, as the student will find this doctrine 
explicitly taught in the great majority of all the systematic 
treatises on the shelves of our libraries, it seems important 
that it should be dealt with critically. 

The doctrine of a Wage-Fund is, in substance, as follows. : 
There is, in any country, at any time, an amount of wealth 
set apart by economic forces for the payment of wages. The 
ratio between the aggregate capital and the portion thus 
devoted to the payment of wages, is not necessarily the same 
in different countries at the same time, or in the same country 
at different times. That ratio may vary with the conditions 
of industry and the habits of the people ; but at any given 
time, the amount of the wage-fund, under the conditions exist- 
ing, is determined in the amount of capital.* Were the 
amount of that capital greater, the wage-fund would be 
greater, and greater in precisely the same proportion. Were 
the amount of that capital smaller, the wage-fund would be 
smaller, and smaller in precisely the same proportion. 

from a foreign parish, he was not permitted to do so unless he entered 
into a recognizance, often to a considerable amount, to the effect that the 
new-comer should not obtain a settlement, else the bond to be good against 
the employer. Parochial registers are full of such acknowledgments." 

*" There is supposed to be, at any given instant, a sum of wealth 
which is unconditionally devoted to the payment of wages of labor. 
This sum is not regarded as unalterable, for it is augmented by saving 
and increases with the progress of wealth ; but it is reasoned upon as, 
at any given moment, a predetermined amount." — J. S. Mill : The Fort- 
nightly. May, 1869. 



THE WAGE-FUND THEORY. 3 6 5 

The wage-fund, therefore, may be greater or less at another 
time ; but at the time taken, it is definite. The amount of it 
can not be increased by force of law, or of public opinion, or 
through sympathy and compassion on the part of employers, 
or as the result of appeals or efforts on the part of the work- 
ing classes.* 

The sum so destined to the payment of wages is distributed 
by competition. If one obtains more, another must, for that 
reason, receive less, or be kept out of employment. Laborers 
are paid out of this sum, and out of this alone. The whole of 
it is distributed without loss, and the average amount received 
by each laborer is, therefore, determined precisely by the ratio 
existing between the wage-fund and the number of laborers, 
or, as some writers have preferred to call it, between capital 
and population. f 

The wage-fund, at any given time, being thus determined, 
the rate of wages will be according to the number of persons 
then applying for employment. £ If these be more, wages 
will be low ; if these be fewer, wages will be high. 

It thus appears that the wage-fund — the aggregate amount 

* " That which pays for labor in every country is a certain portion of 
actually accumulated capital, which can not be increased by the proposed 
action of government, nor by the influence of public opinion, nor by 
combinations among the workmen themselves. There is, also, in every 
country, a certain number of laborers, and this number can not be dimin- 
ished by the proposed action of government, nor by public opinion, nor 
by combinations among themselves. There is to be a division now, 
among all these laborers, of the portion of capital actually there present." 
— Prof. A. L. Perry, Pol. Econ. In the later editions of his treatise, 
Prof. Perry modifies his statement. 

f " The circulating capital of a country is its wage-fund. Hence, if 
we desire to calculate the average money wages received by each laborer, 
we have simply to divide the amount of this capital by the number of 
the laboring population." — Prof. H. Fawcett: The Economic Position of 
the British Laborer. 

X " More than that amount (the wage-fund), it is assumed, the 
wages-receiving class can not possibly divide among them ; that amount, 
and no less, they can not but obtain: so that, the sum to be divided being 
fixed, the wages of each depend solely on the divisor, the number of par- 
ticipants.— J. 8. Mill: The Fortnightly. May, 18S9. 



366 POLITICAL ECONOMY. 

to be distributed as wages — is, at any given time, irrespective 
alike of the number and of the industrial quality of the wages 
class. The average rate of wages is determined exclusively 
by a comparison of the amount of that fund with the number 
of that class. The industrial quality of the laborers has 
nothing to do, at the time, with their wages. 

454. The Doctrine Examined. — What shall we say of this 
doctrine of a Wage-Fund ? Several objections may be urged 
against it, any one of which would be fatal. 

First. The doctrine assumes that wages are always and 
necessarily paid out of capital, the results of past accumula- 
tion. As a matter of fact, wages in England, where this 
theory of wages originated, were, at one time, early in the 
century, paid, financially speaking, out of capital generally, 
if not universally. That condition of things has continued 
to the present time. 

Why was this ? Was it of the essence of the matter, or an 
accident ? 

I answer, wages were advanced by capital in England, 
because capital had there been accumulated to so great extent 
that employers were able to lay down the whole of the wages 
to be paid as soon as the service was rendered, even before 
the products were harvested or marketed, while, at the same 
time, wages were and had been so low that the laborers had 
been able to save little or nothing out of their earnings in the 
past, and were consequently obliged to look to their 
employers for subsistence, almost from the moment they 
began to work. 

But during the same period a very different relation between 
laborer and employer, as regarded the payment of wages, 
existed in the United States. Employers were paying their 
laborers by the year, giving them their wages, in full, only 
when the crops were harvested or the goods marketed, making 
meanwhile such advances as their means allowed, or as were 
required by the varying wants of their workmen, no small 
part of whom had saved enough out of the liberal earnings of 
former years to support themselves and their families until 
fcho year's wages should be paid. 



WAGES PAID OUT OF PRODUCT. 3 6 7 

In other words, the industrial conditions were more favor- 
able to the payment of wages in the United States, while in 
England the financial conditions were more favorable. But 
it is the industrial conditions which determine the amount of 
wages, the necessaries, comforts and luxuries which the 
laborer receives for his services. The financial conditions 
only determine the manner and time of payment, whether at 
once or on a future day, whether in money or in goods. 

455. Wages may be advanced out of Capital, but are paid 
out of the Product. — But even if, in fact, all wages were laid 
down by the employer as soon as services were rendered, 
before the crops were harvested or the goods marketed, it 
would not follow that the existence of capital furnished the 
reason for the employment of labor, or that the amount of 
that capital furnished the measure of the wages to be paid. 

An employer pays wages to purchase labor, not to expend 
a fund of which he may be in possession. He purchases 
labor, not because he wishes to keep it employed, but as a 
means to the production of wealth. He produces wealth, not 
for the sake of producing it, but with a view to a profit to 
himself, individually, in that production. 

If a person have wealth, that, of itself, constitutes no 
reason why he should expend any portion of it on labor, on 
machinery, or on materials. It is only as he sees that he can 
increase that wealth through production, that the impulse to 
employ it in those directions is felt. But for the profits by 
which he hopes thus to increase his store, it would be alike 
easier and safer for him to keep his wealth at rest than to put 
it in motion for the benefit of others. The mere fact that the 
employer has capital at his command, no more constitutes- e, 
reason why he should use it in production, when he can get 
no profits, than the fact that the laborer has arms and legs 
constitutes a reason why he should work when he can get no 
wages. 

We repeat : the employer purchases labor with a view te 
the product of labor. The kind and amount of that product 
determine what wages he can afford to pay. He must, in the 
long run, pay less than that product, less by a sum which is to 



368 POLITICAL ECONOMY. 

constitute his own profits. If the product is to be greater, he 
can afford to pay more ; if it is to be smaller, he must, for his 
own interest, pay less. 

It is, then, for the sake of future production that the labor- 
ers are employed, not at all because the employer has posses- 
sion of a fund which he must disburse. It is the value of 

THE PRODUCT, SUCH AS IT IS LIKELY TO PROVE, WHICH 
DETERMINES THE AMOUNT OF THE WAGES THAT CAN BE PAID. 

Thus, it is production, not capital, which furnishes the motive 
for employment and the measure of wages. 

In saying that production furnishes the measure of wages, 
it is, of course, not to be understood that wages equal the 
product of industry. The advocate of the wage-fund asserts 
that capital furnishes the measure of wages, meaning that the 
amount to be paid in wages is some part of the aggregate 
capital of the country, the ratio between the two varying 
from time to time, indeed, but being, for any given moment, 
fixed by the existing conditions of industry. So I say, pro- 
duction furnishes the measure of wages, meaning that the 
amount to be paid in wages is some part of the product of 
industry, the ratio between the two varying, probably, from 
time to time, from causes innumerable, but being, for any 
given moment, fixed by existing conditions. 

456. "No Wage-Fund Irrespective of the Industrial 
Quality of the Laborers.— But if production furnishes the 
measure of wages, the amount so to be paid can not be irre- 
spective of the industrial quality of the laboring class. If we 
assume that upon a cultivated island are tools and carts and 
animals for draught, and other forms of capital adequate for 
a thousand laborers, the production will vary within a very 
wide range according to the industrial quality of the laborers 
using that capital. If we suppose them to be East Indians, 
we shall have a certain annual product ; if Ave suppose 
Russian peasants to be substituted for East Indians, we shall 
have twice or three times that product ; if we suppose 
Englishmen to be substituted for Russians, we shall have the 
product again multiplied two or three fold. An Englishman 
will do from three to thirty times as much work in a day as a 



WAGES PAID OUT OF PROFIT. 3 6 9 

Bengalee, according as the nature of the work makes smaller 
or larger demands upon the skill and strength of the laborer. 
By the wage-fund theory, the rate of wages would remain the 
same through these changes, inasmuch as the aggregate 
capital of the Island and the number of laborers in the market 
would be unchanged, the only difference being found in the 
substitution of more efficient for less efficient laborers. 
According to the view here advanced, on the contrary, the 
amount to be paid in wages should and would rise with the 
increased production due to the higher industrial quality of 
the laboring population. Whether it would rise in exact 
proportion thereto is not the question we are now considering. 
457. No "Wage-Fund Irrespective of the Number of 
Laborers.— But, further, if production furnishes the measure 
of wages, the amount to be so paid cannot be irrespective of 
the numbers of the laboring class. 

By the wage-fund theory, the amount that can and will be 
paid in wages is a predetermined dividend, the number of la- 
borers being the divisor, and the average wages the quotient. 
Just in proportion as the number of laborers is diminished will 
the average wages be raised ; just in proportion as the number 
of laborers is increased, will the average wages be lowered. 
" There is no use/' writes one of the expositors of this doc- 
trine, " in arguing against any one of the four fundamental 
rules of arithmetic. The question of wages is a question of 
division. It is complained that the quotient is too small. 
Well, then, how many ways are there to make a quotient 
larger ? Two ways. Enlarge your dividend, the divisor re- 
maining the same, and the quotient will be larger; lessen your 
divisor, the dividend remaining the same, and the quotient 
will be larger." 

This theory, that the number of laborers constitutes the di- 
visor of a predetermined dividend, is manifestly erroneous, be- 
cause it leaves out of account the influence upon production 
of the condition of Diminishing Eeturns, or the reverse, in ag- 
riculture, as well as the mechanical effects of the division of 
labor. 

Let us, first, suppose that the island occupied by the body 



37° POLITICAL ECONOMY. 

of one thousand laborers before referred to, contains a great 
breadth of choice arable land, of which the laborers have been 
hitherto able to cultivate but a small portion. If, now, the 
number of laborers be increased twenty per cent, with a cor- 
responding increase of capital, production will be more than 
proportionally increased (see par. 50), through the effect of 
the division of labor and the union of forces in production. 
Here, again, we find the wage-fund theory at fault. So great 
is the virtue of this cause that an increase of laborers — before 
the condition of diminishing returns is reached — might be fol- 
lowed by an increase of production even in the lack of a pro- 
portional increase of capital, or indeed, of any increase at all. 

458. But now let us take the condition of diminishing re- 
turns in agriculture, that state where, if anywhere, it might 
be supposed the wage-fund theory would hold good. In such 
a condition, the soil, as we have seen (par. 51), fails to re- 
spond adequately to new applications of labor ; the product 
falls off, not absolutely, but relatively ; and, thus, while the 
aggregate crops are larger through the incoming of new la- 
borers, the actual amount falling to each laborer is diminished. 
Wages fall. But does this happen in accordance with the eco- 
nomic doctrine we are considering ? No ; per capita wages 
fall, because per capita production is diminished, although 
often this is coincident with an actual increase of capital. 

It would be brutal to inflict further blows upon a body so 
exanimate as the theory of the Wage-Fund. The natural and 
the literary history of this doctrine will be found at length in 
an article in the North American Review, for January, 1875. 



VI. 

THE MULTIPLE OK TABULAR STANDARD OF DEFERRED 

PAYMENTS. 

459. We saw (par. 191) that, with a view to avoiding the 
fluctuations to which even the precious metals are subject, 
through long periods of time, it has been proposed by writers 



THE TABULAR STANDARD. 37 1 

of eminence to create a multiple or tabular standard of value. 
This is to be done by joining together a number of articles, of 
importance in the economy of daily life, in such a way that the 
fluctuations of value in the several constituent articles shall 
largely neutralize each other. 

460. The details of the scheme as proposed by these writers 
may be stated as follows. A number of articles in general use, 
corn, beef, potatoes, wool, cotton, silk, tea, sugar, coffee, indigo, 
timber, iron, coal, and others, shall be taken, in a definite 
quantity of each, so many pounds or bushels or cords or yards, 
to form the standard required. The value of these articles, 
in the quantities specified and all of standard quality, shall be 
ascertained monthly or weekly by government, and the total 
sum which would at the time purchase this bill of goods shall 
be, thereupon, officially promulgated. Persons may then, if 
they choose, make their contracts for future payments in terms 
of this multiple or tabular standard. 

For example, suppose I sell a house to-day, the value of 
which, as agreed upon between myself and the purchaser, is 
$20,000, one-half to be paid down at the time, two-tenths to 
be paid in two years, three-tenths in five years, with interest 
on the last two sums. One-half of the purchase money, being 
payable at once, is paid in money, $10,000 in gold or bank 
notes. For the rest, the purchaser and I look at the last pub- 
lished statement of the government commissioner, and find the 
value of a unit of the tabular standard to be $12.50 ; that is, 
$12.50 will now purchase the bill of goods which form the 
standard. The purchaser then gives me two notes, one for 
320 units of the tabular standard, payable in two years, and 
one for 480 units, payable in five years, with interest at six 
per cent., per annum, meanwhile. At the end of the first year, 
the two parties interested look in the official gazette, and find 
the value of the unit at the time to be $12.75. There is then 
to be paid one year's interest on each note, amounting, in the 
case of the first note, to 19.2 units, which obligation is dis- 
charged by the payment of $244.80 in current money ; and, 
in the case of the second note, to 28.8 units, which obligation 
is discharged by the payment of $367.20. 



37 2 POLITICAL ECONOMY. 

At the end of the second year the value of a unit of the 
tabular standard might be ascertained to be $13, or $12.25 ; 
in the latter case the interest on the first note is discharged 
by the payment of $235.20, and that on the second note by 
the payment of $352.80. If, however, the value of a unit 
has been ascertained to be $13, the interest on the first note 
will be $249.60, and that on the second note $374.40. 

But the principal of the first note, 320 units, is now to be 
paid. A similar computation shows that, if the value of the 
tabular standard is $12.25, the maker of the note must pay 
$3,920 to discharge his obligation ; if the value of the unit be 
$13, he must pay $4,160. 

461. What has been Effected? — Now, without waiting for 
the maturity of the second note, let us see what the use of 
the tabular standard has thus far effected. When I sold my 
house, two years before, I gave the purchaser two years' credit 
for two-tenths of the price. Had I taken the money at the 
time, it would have bought me so many pounds of beef, so many 
bushels of corn, so much iron, coal, etc. Now, at the end of 
the second year, what I receive as the stipulated two-tenths 
payment for the house will bring me precisely the same amount 
of beef, corn, iron, coal, etc. Meanwhile the debtor has paid 
me, every year, as interest, enough to enable me to purchase 
six parts in a hundred of this entire list of commodities. The 
purchaser has had the advantage of obtaining credit, to that 
extent, but has derived no unearned benefit from the delay of 
payment ; and, on the other hand, has been protected from 
any loss through that source. 

462. It is to be observed regarding the proposed tabular 
standard, first, that it is not obligatory upon any one to use 
it. Persons buying and selling still make their contracts in 
terms of money if they please. The government merely 
affords them the opportunity to make their contracts payable 
in units of the tabular standard, if it be worth their while to 
do so. Secondly, the only machinery required for the opera- 
tion of this system would be a commission to ascertain the 
current prices of the articles on the official list and to publish 
the same. No new method of accounting would be intro- 



THE TABULAR STANDARD. 373 

duced. Interest and principal could be computed as easily as 
under the present system. The courts would enforce the obli- 
gation of contracts on precisely the same principles when 
expressed in units of the tabular standard, as when expressed 
in dollars or pounds sterling. Thirdly, no new medium of 
exchange would be introduced. The creditor would not be 
obliged to receive, at the maturity of the note, so many cart- 
loads of vegetable, animal and mineral products, to be hawked 
about for sale. The payment, at the maturity of the obliga- 
tion, would be made in money. The only effect of the intro- 
duction of the tabular standard would be to decide how much 
money at that date constituted the equivalent, in the power 
to purchase the necessaries, comforts and luxuries of life, of the 
money which would have been paid had the sale been for cash. 
In short, it is a means of giving and taking credit without 
receiving an unearned advantage or suffering an undeserved 
injury through fluctuations in the value of money. 

463. Is it Practicable? — Such being the contemplated 
advantages of the system of a tabular or multiple standard, 
the question whether the use made of the system, if established, 
would be worth the small degree of effort necessary to 
establish it, is a question which could only be answered after 
trial. The mere fact that the scheme is sound and the 
advantages of its adoption unquestionable, would not of 
itself be sufficient to secure any considerable application of 
this standard to the actual operations of trade. It took 
hundreds of years for the Arabic figures to drive the 
abominably clumsy Roman figures out of the counting rooms 
of great merchants and bankers. The slow progress of the 
metric system, even in this age of innovations and of quick 
communication, affords a measure of the difficulty of sup- 
planting one habit of trade by another, however much supe- 
rior. 

The practical limits of this system, were it to be once intro- 
duced and tried, are fairly a matter of doubt. Prof. Jevons 
deemed it pi'acticable to extend this mode of determining the 
claim of the creditor, the obligation of the debtor, to ordi- 
nary commercial paper having three months or more to run. 



374 POLITICAL ECONOMY. 

I do not myself apprehend that the system would trench, in 
any considerable degree, on the field of so-called commerce. 
The merchant, buying every day and selling every day, giv- 
ing notes with one hand and taking them with the other, may 
fairly look to see his losses, through fluctuations in the pur- 
chase power of money, offset by his gains through the same 
source ; or, in a worse result, he is in a position, by greater 
energy and economy, to make good his capital. It is essen- 
tial, or at least highly important to the conduct of business, 
in the modern organization of industrial society, that the mer- 
chant or manufacturer shall be able to tell just where he 
stands, at any time ; to strike an exact balance between assets 
and liabilities. But this would not be possible with the tabu- 
lar standard. A note for 400 units, payable in September, 
might not offset a note for 400 units receivable in August or 
October. The difference might be small ; it might also be 
large. It would thus be impracticable for the man of business 
to cast up, at a moment, the results of any given transaction, 
or ascertain precisely his own standing. By the very descrip- 
tion of the system, every note given or taken would have to 
be liquidated. 

Commerce will not tolerate any such obstruction ; and the 
scheme, so far as this application is concerned, may be dis- 
missed at once. Commerce will do the best it can with the 
use of money and of credit expressed in terms of money. 
Nothing is more characteristic of the commercial spirit than 
the disposition to take the evil with the good, roughly to 
strike the average of gain and loss, promptly to charge-off 
bad debts, always looking on towards the future, never regret- 
ting the past. This spirit leads, doubtless, into many errors, 
but it is the very life of commerce. 

464. For what classes of contracts, then, might the multiple 
tender be advantageously employed ? 

Certainly the need of such a standard of deferred payments 
is most imperative in the case of those who are not in the 
way of repairing any losses they may suffer through fluctua- 
tions in the value of money ; upon whom the full effects of 
depreciation fall directly and remain without relief. And 



TRADE UNIONS. 375 

while the advantages of such safeguards upon the value of 
debts here rise to their maximum, the obstruction ginks here 
to a minimum. In permanent investments of property not 
the least inconvenience will be encountered by the scheme of 
a multiple tender, which might be extended to the cases of all 
who have definitively retired from active life, carrying away 
with them all they will ever have to support old age and 
provide for their children ; to the cases of trustees and 
guardians, under a solemn responsibility in the care of estates, 
where loss is more to be dreaded than gain to be desired ; to 
the cases of institutions whose funds are sequestered from the 
stock of active capital, for pious and charitable uses. The 
funds of savings banks might be put under the same safe- 
guard, and government loans might also be issued in terms of 
the multiple tender. 

VII. 

TRADE UNIONS AND STRIKES. 

465. Wholly a Practical Question.— It has been shown 
(pars. 348-56) under the title of Distribution, that the question, 
whether any law or institution does or does not promote the 
freedom of industrial movement enjoyed by the community, 
is a question not to be decided d priori. Consideration must 
be had of the actual effects of such a law or institution, com- 
parison being made not between the state which will result 
therefrom and an ideal state of perfect economic mobility, but 
between the new condition and the condition which does exist 
or probably would exist without that law or institution. 

Let us take the case of Trade Unions, so called, which 
undertake, through agreements among themselves and perhaps 
simultaneous strikes against their employers, to fix wages, 
regulate the hours of labor, and control many of the various 
details of industry. To the first suggestions of such associ- 
ations, the economist promptly and properly objects that all 
combinations in the sphere of economics are opposed to compe- 
tition. The objection is well taken, and it remains for the 



376 POLITICAL ECONOMY. 

advocate of trade unions to show sufficient cause for thus 
obstructing competition. 

The economist further alleges that such associations are 
liable, are even likely, to fall under the control of demagogues, 
who will use their power to bully or harass employers, to make 
unreasonable demands, and to precipitate labor contests, in 
which the interests of all classes will be sacrificed to the self 
importance of a few managers. This point, again, is well 
taken. That liability, that likelihood, exists, and the advocate 
of trade unions is bound to show no small degree of practical 
benefit resulting from such associations, to offset the mischief 
they are almost certain to commit in the ways indicated. 

466. On the other hand, the advocate of trade unions 
alleges that these associations, though in form opposed to 
competition, and though subject to many abuses, do yet, in 
certain states of industrial society, assist the laborers as a 
class to assert their interests-in the distribution of the product 
of industry. This claim is not, on the face of it, unreasonable. 

We have seen (pars. 343-5) that competition, perfect com- 
petition, affords the ideal condition for the distribution of 
wealth. But as we saw in the case of the audience in a 
theater that had taken fire, the action of men in concert and 
under discipline, while it can never be wiser than that of men 
acting coolly and intelligently for themselves, may be far 
wiser than the action of men stricken with panic and hurried 
into a senseless, furious rush. Respecting trade unions, the 
question is not, whether joint action is superior to the indi- 
vidual action of persons enlightened as to their industrial 
interests, but whether joint action may not be better than the 
tumultuous action of a mass, each pursuing his individual 
interest with more or less of ignorance, fear and passion. 

Now, with a body of employers, few, rich and powerful, 
having a friendly understanding among themselves and acting 
aggressively for the reduction of wages or the extension 
of the hours of work, and, on the other side, a body of labor- 
ers, numerous, ignorant, poor, mutually distrustful, while each 
feels under a terrible necessity to secure employment, who 
shall say that such a body of laborers might not be better able 



STRIKES. 377 

to resist the destructive pressure from the employing body, 
if organized and disciplined, with a common purse and 
with mutual obligations enforced by the public opinion of their 
class ? 

I said, destructive pressure, for we saw that the pressure of 
competition, if it be unequal, may lead to the degradation of 
the laboring class (pars. 345-7), just as the waves over which 
and through which a ship rides unharmed, when herself free 
to move, become crushing and destructive, let once the shipV 
bow be jammed between rocks or lodged in the sands. 

467. II. Strikes. — The question of the economic influence of 
strikes is a distinct question. There have been trades unions 
which seldom or never resorted to strikes. Some of the great- 
est strikes have occurred without the agency of organized trade 
unions. For myself I entertain no doubt that the early strikes 
in England, which followed the repeal, in 1824, of the Combi- 
nation acts, were essential to the breaking up of the power of 
custom and fear over the minds of the working classes of the 
Kingdom. For centuries it had been a crime, by statute, for 
workmen to combine to raise wages or shorten the hours of 
labor, while masters were left perfectly free to combine to 
lower wages or lengthen the hours of labor. The beginning 
of the century found the laboring classes of England almost 
destitute of political franchises, unaccustomed to discussion 
and the free communication of thought, tax-ridden, poverty- 
stricken, illiterate. What else than the series of fierce revolts, 
the rebellions of down-trodden labor, which followed Huskis- 
son's act of 1824, could, in an equal period of time, or, indeed, 
at smaller cost, have taught the employers of England to 
respect their laborers, and have taught the laborers of England 
to respect themselves ; could have made the latter equally con- 
fident and self-reliant in pressing home a just demand, or made 
the former equally solicitous to refuse no demand that could 
reasonably be conceded ? 

For, be it remarked, perfect competition, which affords the 
only absolute security possible for equitable and beneficial dis- 
tribution, requires that each and every man for himself shall 
unremittingly seek and unfailingly find his best market. If 



378 POLITICAL ECONOMY. 

for any reason, /whether from physical obstruction or legal 
inhibition, or from his own poverty or weakness of will or 
ignorance, or through distrust of his fellows or a habit of sub- 
mission to his employer or his social superiors, any man fails, 
in fact, to reject the lower price and to seize the higher price, 
the rule of competition is violated ; all immunity from deep 
and permanent economic injury is lost; the man may be crushed 
in his spirit, in his health, in his habits of life, and may thus 
sink finally and hopelessly to a lower industrial grade. The 
history of mankind is full of examples of large popu- 
lations broken down by a competition to which they were 
unequal, until they have become pauperized, brutalized and 
diseased beyond the power of any purely economic causes to 
raise them upwards and restore them to industrial manhood. 

468. Strikes are the Insurrections of Labor. — In claiming 
that strikes may, in certain states of industrial society, in their 
ultimate effect really aid the laboring classes, let me not be 
misunderstood. To strikes I assign the same function in indus- 
try which insurrections have performed in the sphere of poli- 
tics. Had it not been for the constant imminence of insurrec- 
tion, England would not through several centuries have made 
any progress towards freedom, or even have maintained its 
inherited liberties. 

Strikes are the insurrections of labor. They are, wholly, a 
f destructive agency. They have no creative power, no heal- 
ing virtue. Yet, as insurrections have played a most important 
part in the political elevation of downtrodden people, through 
the fear they have engendered in the minds of oppressors, or 
through the demolition of out-worn institutions which have 
become first senseless and then pernicious, so strikes may 
exert a most powerful and salutary influence in breaking up a 
crust of custom which has formed over the remuneration of a 
body of laborers, or in breaking through combinations of 
employers * to withstand a legitimate advance of wages. 



* " Masters are always and everywhere in a sort of tacit, but constant 
and uniform, combination not to raise the wages of labor above their 
actual rate." — Adam Smith. 



WHAT IS THE FAILURE OF A STRIKE? 379 

Doubtless even more important than the specific objects 
realized by strikes, has been the permanent impression produced 
upon the minds and the temper of both employers and 
employed. The men have acquired confidence in themselves 
and trust in each other ; the masters have been taught respect 
for their men, and a reasonable fear of them. 

Nothing quickens the sense of justice and equity like the 
consciousness that unjust and inequitable demands or acts are 
likely to be promptly resented and strenuously resisted. 
Nothing is so potent to clarify the judgment and sober the 
temper, in questions of right or wrong, as to know that a 
mistake will lead to a hard and a long fight. 

469. What is the Failure of a Strike?— Nor must it be 
thought that because strikes often, perhaps we might say com- 
monly, fail of their immediate object, they are, therefore, 
nugatory. Many an insurrection has been put down speedily, 
perhaps with great slaughter, which has been followed by 
remission of taxes, by redress of grievances, by extension of 
charters and franchises. It may be considered doubtful 
whether the successful or the unsuccessful insurrections of 
England have done more to advance English liberties. Of 
the rising of the peasantry against Richard II., which was 
suppressed in a few days, Prof. Thorold Rogers says : " The 
rebellion was put down, but the demands of the villains* were 
silently and effectually accorded. As they were masters for a 
week of the position, the dread of another servile war pro- 
moted the liberty of the serf." Even an unsuccessful strike 
may make employers more moderate, considerate and 
conciliatory, as they recall the anxieties, the struggles and the 
sacrifices of the conflict. 

470. Better than Strikes.— Yet, as insurrections mark off 
the first stages of the movement towards political freedom, so 
strikes belong to the first stages of the elevation of masses of 
labor, long abused and deeply debased. Happy is that people, 
and proud may they be, who can enlarge their franchises 
and perfect their political forms without bloodshed or the 

* Persons holding land by a servile tenure. 



380 POLITICAL ECONOMY. 

threat of violence, the long debate of reason resulting in the 
glad consent of all. In like manner, no body of laborers can 
get for themselves by extreme measures so much of honor and 
of profit as they will when, through cultivating moderation, 
good temper and the spirit of equity, they [attain the 
capability of conducting their probably unavoidable disputes 
with the employing class to a successful conclusion without 
recourse to the brutal and destructive agency of strikes. 
With political rights such as are enjoyed by all classes in the 
United States, with universal education, free land, the quick 
communication of ideas, the cheap transportation of persons 
and effects, the abundant opportunities offered for accumulat- 
ing and investing savings, it is a shame to us, as a people, 
that we have not yet made for ourselves a better way out of 
our industrial disputes. 

471. III. Factory Acts.— We should apply the same tests to 
any existing or projected legislation intended for the relief of 
the laboring classes, such as acts restricting the hours of 
labor, providing for the safety of operatives against accidents 
from machinery, directing the sanitary inspection of work- 
shops and factories, prohibiting the employment of children 
of tender age or of women underground, or in work unsuited 
to their sex, or immediately before or after confinement. The 
one question in regard to each such measure is not whether 
its intention is philanthropic or otherwise ; not even whether 
it does or does not, in form, violate the principle of competi- 
tion ; but whether it does, in effect,* and in the large, the 
long, result, leave the laboring classes better off or worse off, 
as to the ability and disposition to seek and to find their best 
market ; whether, in fact, in the condition of industrial 
society then and there existing, it promotes or retards 
competition. 

The beginning of the present century found children of 

* " In discussing these matters, we need, above all things, discrimina- 
tion. One hundred modes of government interference might be mentioned 
of which fifty might be very desirable and fifty condemnable. In each 
case, as I contend, we must look to the peculiar aim, purpose, means and 
circumstances of the case. " — Prof. Jevons: Ths State in Relation to Labor. 



FACTORY LAWS. 3 Sl 

five, and even of three years of age, in England, working in 
factories and brick-yards ; women working underground in 
mines, harnessed with mules to carts, drawing heavy loads ; 
found the hours of labor whatever the avarice of individual 
mill-owners might exact, were it thirteen, or fourteen or 
fifteen ; found no guards about machinery to protect life and 
limb ; found the air of the factory fouler than language 
could describe, even could human ears bear to hear the story. 

472. English Factory Legislation.— The factory legisla- 
tion of England, the necessity and economic justification of 
which the Duke of Argyll has called (par. 248) one of the 
great discoveries of the century in the science of government, 
began in 1802, with an act which limited the hours of labor 
in woolen and cotton mills to twelve, exclusive of meal times, 
imposed many sanitary regulations upon the working and 
sleeping rooms of operatives, required the instruction of 
children during the first four years of apprenticeship, and 
provided an official inspection of establishments for the due 
execution of the law. Further legislation was had in 1816 
and 1831 ; while in 1833 was passed the important act known 
as 3d and 4th William IV. (ch. 103), which forbade night 
work in the case of all persons under eighteen years, and 
limited the labor of such persons to twelve hours, inclusive of 
an hour and a half for meals ; prohibited the employment of 
children under nine years of age — while, between the ages of 
nine and thirteen, the hours of labor were reduced to eight ; 
prescribed a certain number of half-holidays, and required 
medical certificates of health on the admission of children to 
factories. Numerous acts have enlarged the scope of these 
provisions and extended them to other classes of workshops 
and factories ; while, with the good faith and thoroughness 
characteristic of English administration of law, a rigid and 
relentless inspection compels a punctilious compliance with 
these provisions in every workshop and factory of the king- 
dom. The principle of the English Factory acts has been 
slowly extended over the greater part of Europe. 

473. Economists Oppose Factory Legislation.— Unfortun- 
ately for political economy, its professors in the Universities, 



382 POLITICAL ECONOMY. 

in Parliament, and in the press, generally ranged them- 
selves in opposition to this legislation. Acting upon a series 
of arbitrary assumptions which fell far short of the facts of 
human nature, the English economists insisted upon attribu- 
ting to the individual initiative of the laborer, however 
miserable and blind and weak, however overborne by circum- 
stances and bound to his place and work by poverty, ignorance 
and inertia, all that economic virtue which belongs to the 
individual initiative of the laborer when fully alive to his own 
interest, alert in seeking the highest price for his services or 
commodities, and able to move freely to his best market with- 
out hindrance from any source, whether within or without him- 
self. They asserted that labor was fully competent to protect 
itself against abuses, if left free by law. They asserted that 
all restrictions upon industry are obstructive, failing to see that 
while restriction and regulation are obstructive as against an 
imagined condition of perfect practical freedom, these may 
actually increase the ease and readiness of movement in a state 
where obstructions exist on every hand. They argued that to 
limit the power of the operative to sell his labor must, in the 
end, diminish the price he will get for it, not seeing that, just 
as a crutch, while it is only a hindrance and a burden to a 
sound man, may keep a cripple from falling to the ground, 
and may even enable him slowly and feebly to walk, so a 
restriction upon contracts for labor may correspond to an 
infirmity of the laboring classes under certain moral and 
physical conditions, in such a way as to give them a greater 
freedom of movement than they would have without it. 

I said that it was unfortunate for political economy that the 
professional economists of England opposed the factory acts. 
This had the effect to set both men of affairs and the masses 
of the people against political economy. The latter were alien- 
ated by what they deemed either indifference to human suffer- 
ing or subserviency to the interests of capital. The former 
saw how far wrong the pursuit of this so-called science could 
carry intelligent men, on a practical question. To them this 
seemed to justify the contempt so generally entertained by 
men of affairs for "theorists." The cause of the trouble was 



FACTORY LAWS. 383 

not that the economists were theorists, but that they were bad 
theorists. Their theories did not cover the facts of the case 
they had undertaken to deal with. The economic men* they 
had created for the purposes of their reasoning were no more 
like Englishmen than were the Houyhnhnms of Jonathan 
Swift. 

That legislation prohibiting factory labor in excess of what 
is compatible with health and strength, having due respect to 
conditions of age and sex, requiring the observance of sanitary 
principles, and protecting working people against abuses as to 
the time and form of paying wages* may be practically bene- 
ficial in a high degree, has long passed beyond controversy 
among the statesmen of nearly all civilized countries. If 
political economy objects to such legislation, so much the 
worse, as I said before, for political economy. But I hope 
there has been shown sufficient reason for holding that no such 
opposition of principle exists ; and that both the largest pro- 
duction and the most equitable distribution of wealth may be 
subserved by legal regulations wisely conceived to meet the 
grave and perhaps incurable infirmities of manufacturing 
populations. 

*See par. 21. 

f Along series of parliamentary battles have been fought over the ques* 
tion of Truck, that is, the payment of wages in commodities instead of 
the money of the realm. By the act of 1833, this practice (except in the 
form of giving " board" as a part of wages) was prohibited in respect 
to mining and manufacturing industry generally. 



384 POLITICAL ECONOMY. 

VIII. 

THE KNIGHTS OP LABOR. 

474. Their Relations to Trade Unions. — The public mind 
of England and, though in a less degree, of America, has 
become accustomed to the idea of the organization of bodies 
of laborers, for mutual support and for the promotion of their 
common interests. Beginning fifty or sixty years ago, the 
modern trade union has worked its way, against a deep preju- 
dice on the part of employers and of economists, alike, to very 
general acceptance. I believe it to be true that the best pub- 
licists and the most judicious men of business in England con- 
cede that the trade unions of the kingdom, whatever errors 
may have been committed in the course of their develop- 
ment, now fully justify themselves by their acts. In the 
United States, I have, within the past year or two, been 
assured by three prominent railroad presidents that they 
would greatly prefer dealing with the locomotive engineers 
as members of their brotherhood, to dealing with them indi- 
vidually ; and that they believed the influence of this organi- 
zation to be, over the whole country, good. Generally speak- 
ing, however, employers among us are less fully reconciled to 
the existence and activity of trade unions than are employers 
in England, probably because trade unions, with us, are in a 
stage which in England was passed almost a generation 
ago ; perhaps, also, because such associations are less needed 
here than there. 

Within the past three or four years, a new development in 
the organization of the laboring class has taken place in the 
United States, in the form of a general confederation of trade 
unions, re-enforced by large numbers of persons not attached 
to any union, under the title, Knights of Labor. The essen- 
tial object of the new confederation is to bring to bear upon 
employers, either in strikes or during those discussions, regard- 
ing hours of work, rates of wages, etc., which might be expected 
to result in strikes, a pressure more severe, more unremitting, 



THE KNIGHTS OF LABOR. 3 8 5 

more far-reaching, than any isolated body of laborers or even 
the most formidable trade unions could hope to produce and 
maintain. By drawing the whole laboring class* of the coun- 
try into one mighty confederation, whose trade districts and 
assembly districts, while they provide for the local needs, or 
the characteristic trade requirements, of their several constitu- 
encies, shall yet be subject to the legislation of a general labor 
congress and to the executive authority of a supreme council, 
it is intended to inaugurate a new era in the so-called " conflict 
of labor and capital." 

In principle, this organization does not differ from the 
smallest trade union. The distinction between the two is one 
purely of degree. In practical effect, however, the Knights 
of Labor, if they shall accomplish as much as one-half their 
declared purposes, will produce a veritable revolution in indus- 
try : a change, no longer of degree, but of kind. 

The difference is just here. Up to this time the labor organ- 
izations, the trade unions, have, on the whole, not done more 
than offset the great economic advantage which the employ- 
ers of labor enjoy in the increasing struggle over the product 
of industry. When I say the labor organizations have not 
done more than this, I do not overlook the fact that they have, 
at times, done a great deal which was aside from this ; have 
wrought much mischief, in bad blood or under the guidance of 
demagogues, through acts which were reprehended not less by 
their own wiser members than by the general sense of the 
community. What I mean to say is, that, irrespective of»GUcli 
sporadic acts of folly, the power given to the working classes 
by their organizations, added to the power which those classes 
would have wielded, if unorganized, has not been more than 
enough to secure the full, attentive and respectful consider- 
ation of their interests and claims. It has not been enough, 
speaking broadly, to overbear the master's rightful authority, 



* In fact, the Knights of Labor, at their maximum, included about ten 
per cent, of the laboring population, agricultural or mechanical. Within 
the large factory industries, however, the proportion was very much 
greater, the " Knights" having almost complete control of many trades. 



3 86 POLITICAL ECONOMY. 

to interfere with his necessary control of his business, to ren- 
der it unsafe for him to undertake contracts, much less to 
transfer the initiative in production from him to his 
workmen. 

475. The Laborer must look out for his own Interest.— 
The reader who has carefully followed the course of discussion 
in this treatise will not have failed to apprehend the opinion 
of the writer, not only that an active and even eager pursuit 
of their own interests by the working classes is a condition of 
their realizing the utmost economic good that might be 
brought to them, but that it is, not less, for the interest, the 
particular, selfish interest of the employing class themselves,, 
that they should have to do with men who are acute and alert 
in searching out opportunities for the improvement of their 
own condition, with men who are bold and persistent in 
following up every possible advantage. I believe that the 
industrial republic has as little need as has the political republic, 
of citizens who have no opinions for themselves as to their rights- 
and interests, but thankfully receive whatever, in the time and 
place, may be offered them. I believe it is eminently for the 
prosperity and growth of the community that each and every 
member, whatever his place in the industrial order, should 
strongly desire to improve his condition, and should seek to do 
so by all means which are compatible with industrial peace. 
I have even, under a preceding title (Strikes), expressed the 
opinion that, on rare occasions and for manifestly good reasons, 
industrial warfare itself may result in the better adjustment 
of economic relations. 

476. The Balance of Power between Employers and 
Employed. — The accomplishment of the avowed purposes of 
the Knights of Labor, however, would lead to the complete 
subjugation and subjection of the employing class, a result, 
which, in my view, would be fraught with the most mischiev- 
ous consequences. Up to this time the trade unions have, in 
general, brought to bear a sufficient pressure to make employ- 
ers carefully considerate of the wishes and interests of their 
laborers, anxious to avoid all causes of offense, willing to con- 
cede whatever they possibly can. This is as it should be. 



THE KNIGHTS OF LABOR. 3 8 7 

^No good comes from the exercise of unchecked and irrespon- 
sible power in industry, any more than in government. 

On the other hand, the trade unions, up to this time, while 
they have been able to make themselves heard and considered, 
while they have had all the power necessary to cause the 
employer to be desirous and even anxious to concede every 
reasonable demand, have yet, in the main, shown a sense of 
responsibility for the fairness and reasonableness of their 
demands. They have known at the outset, or have learned 
as the result of unsuccessful contests, that there is a limit to 
their power ; that, in making excessive and exorbitant claims, 
they are likely to be beaten ; and that every defeat on such 
an issue weakens themselves and strengthens their antagonists 
for any future contest. In a word, while, under the condi- 
tions which subsisted until within the last three or four years, 
many employers were, by force of temperament, unreasonably 
arbitrary, and large bodies of laborers were, on their side, often 
unreasonably exacting, something approaching an equilibrium 
had been reached between the powers of the two parties, 
securing industrial peace to as great a degree as might fairly 
be expected under the rightful and desirable ambition and 
self-assertion, the fortunately growing ambition and self- 
assertion, of the working classes. 

477. The Subjugation of the Employer.— On the other 
hand, such a confederation of labor as is now proposed and 
attempted would utterly destroy the balance of industrial 
power, leaving the employer only the choice between conced- 
ing any and all demands, however unreasonable, or ceasing to 
produce. And this object is distinctly avowed by the leaders 
in this movement, some of whom have carried their scheme 
out to its full logical consequences, declaring it to be their 
purpose to bring about a state of things, in which, while the 
employer shall still occupy his formal attitude in production, 
he shall be, in effect, only the paid, doubtless the well-paid, 
agent of what they are pleased to call "the productive 
classes." The employer is still to remain the superintendent of 
the industrial operations ; he is still to risk his own capital 
and the borrowed capital for which he has made himself 



388 POLITICAL ECONOMY. 

responsible ; lie is still to exert his technical, administrative 
and financial skill in the conduct of the business over which 
he is placed ; he is still to exercise authority, so far as 
permitted, over the personnel of the works or factory. But 
the real initiative in production is to rest, not with him, 
but with the council or committee or executive officer, not, 
indeed, of his own laborers, but of those of the whole country ; 
he is to engage no one and to discharge no one, without con- 
sent ; others are to decide for him all questions relating to the 
quality of work or the conduct of his workmen ; the hours and 
general conditions of labor, the rates of wages and the times 
and modes of payment, are to be determined by the general 
parliament of labor or under its authority. 

Beyond this, I do not understand that it is the present pur- 
pose of the promoters of this movement to go. For example, 
if I rightly understand the matter, the employer, having pro- 
duced goods under the conditions recited, will be left free to 
dispose of them at his pleasure, selling them to whom he will, 
at such prices and on such terms of payment as he choose, 
unless, indeed, that be prevented by some " boycott," * placed 
upon some person or class of persons, or upon some kind of 
goods, or upon the product of certain machines, under author- 
ity of the parliament of labor or of its executive officers, for 
some industrial, political, social or personal reason. 

478. Difficulties Attendant on the Scheme.— Of course, no 
" long headed " man, and there are many such among the pro- 
moters of this movement, expects that any one of the present 
employers of labor will find the conditions thus imposed agree- 
able,or will submit to them if he has any choice, short of leav- 
ing business. They anticipate that many employers will refuse 
to submit to such conditions and will relinquish production, 



* The designation of this new weapon of industrial and social warfare 
is derived from an Irish gentleman, one Captain Boycott, against whom 
it was, a few years ago, so conspicuously employed by his hostile tenants 
as to cause his name to be permanently affixed thereto. To boycott is 
simply to place under a ban. No person who respects the authority 
which lays the boycott will deal with a person thus placed under the ban, 
or with any person who does deal with him. 



THE KNIGHTS OF LABOR. 389 

perhaps with consequences immediately injurious to their labor- 
ers and to the community. They anticipate that others will 
resist violently, throwing their whole energies and fortunes into 
the contest, fighting with fury, as if for life, and only ceasing 
their struggles when bound hand and foot. But they expect that 
still others will submit, more or less unwillingly, to the terms 
imposed upon them, and will consent to carry on business under 
the new regime. The next generation of employers they look to 
see made up of men bred and trained under the new conditions, 
men who, born into such a state of things, and not knowing 
any other, except historically, as belonging to a bad past age, 
when the rights of labor were not respected, will accept the 
situation as cheerfully as the Frenchman of to-day accepts the 
great Revolution. Such men, it is believed, will be both glad 
and proud to wield the limited, delegated powers then pertain- 
ing to the position of the employer of labor; and will, in good 
faith and good feeling, execute the laws and decrees of the 
parliament of labor or of its supreme or local council or of any 
committee thereto authorized. 

Probably, also, none of the more clear sighted of the pro- 
moters of this movement anticipate that the legislation of 
their congress or the decrees of their standing councils or the 
acts of their executive officers will, at first or for a long time, 
be free from much that is visionary and unpractical, or even 
from the influence of personal piques, jealousies and animosi- 
ties. They doubtless anticipate that much that is futile will be 
attempted, and that much that is mischievous will be accom- 
plished. No intelligent person could possibly believe that such 
tremendous and far-reaching powers could be placed, all at 
once, in the hands of a few men without grave abuses being gen- 
erated ; or that a machine so gigantic could be set up and put to 
working without much jarring and friction, and an occasional 
accident, even if a permanent breaking-down be avoided. 

The men who are concerned in this movement are shrewd 
enough to see that the sense of the entire helplessness of the 
employing class must inevitably affect, and affect profoundly, 
the judgment and the will of the soundest, wisest, and most 
fair-minded representatives whom the body of laborers 



39° POLITICAL ECONOMY. 

could select, rendering them less sound, less wise and less fair- 
minded than they would be in dealing with a body of employ- 
ers who were not helpless, but had the power to resist and to 
strike back, if crowded too far. These men, also, are shrewd 
enough to see that there is great likelihood that the sense of 
the helplessness of the employing class will so operate, at least 
in the first instance, upon the minds of the body of laborers 
as to cause them to select, as their representatives, not the 
soundest, wisest and most fair-minded of their class, but those 
who are extreme, arbitrary and arrogant in character and in 
manners, and who will fast become more and more so, through 
the exercise of such tremendous powers. 

All this, any clear-minded person must see, on the first con- 
templation of such a scheme ; all this, doubtless, the leaders of 
the Knights of Labor fully realize ; but were these probabili- 
ties presented as an objection to that scheme, they would ans- 
wer, that the education of the mass of laborers, to use, without 
abuse, such and so great industrial powers, is, in their belief, 
practicable, in time, in such time as would be taken for accom- 
plishing any other great moral and intellectual advance; and 
that such an education and training of the mass of laborers 
would itself be a social and political gain, far transcending in 
value even the industrial blessings which the most sanguine 
could look for from the fullest success of the proposed scheme 
of democracy in industry. 

479. Another View of the Knights of Labor.— I have 
sought to state, fully and fairly, what I understand to be the 
purpose of the leading promoters of the organization known 
as the Knights of Labor. Probably many, even among the 
leaders in this movement, probably most of the members of 
the organization, regard it as an effort to give encouragement 
and moral support to the constituent trade unions and to 
bodies of labor heretofore isolated ; as a means of stimulating 
the self-respect and self-assertion of the laboring class, of 
promoting their mutual acquaintance, of strengthening the 
feeling of a common interest among them, rather than as a 
serious attempt to reverse the relations heretofore subsisting 
between employer and employed and to transfer the initiative 



CAN PROFITS BE CONFISCATED* 39 l 

in production and the control of industry from the former 
to the latter class. In this narrower sphere, it is conceiv- 
able that an organization like the Knights of Labor might 
become a great educational force ; a useful agency for direct- 
ing the efforts of its members toward the improvement of 
their condition ; a source of much inspiration, through the 
deliberations and debates of earnest men, representing the 
better sense and higher purposes of vast bodies of laborers, in 
the main, right-minded, honest and patriotic. Indeed, it is 
not improbable that, should the confederation relinquish its 
larger designs, it will assume this less ambitious but more 
useful function. How fully and how long it would, in such 
a capacity, be supported by the efforts and contributions of 
its present members, we need not consider. 

480. Can Profits be Confiscated ?— Reverting to the larger 
scheme, openly avowed and vigorously advocated, of those 
who would make the Knights of Labor all that has been 
described, let us ask, how far the object aimed at is desirable ; 
how far it is, in itself, practicable ; how far such an organiza- 
tion is suited to accomplish that object. 

In the first place, can one be mistaken in deeming it the main 
object of this industrial enterprise to secure to the laboring 
class the benefit of a part, perhaps the greater part, of the 
profits now realized by the body of employers, which the 
laborers regard as excessive ? If this be, indeed, the main 
object of the association, the aim is, if I have rightly indicated 
the origin and measure of business profits, a mistaken one. 
Profits are not obtained by deduction from wages ; they are 
purely the creation of the employers themselves. The mass 
of profits represents the wealth produced by able, skillful, 
resolute and far-seeing men of business, over and above that 
which is produced, with the same amount of labor power and 
capital power, by employers who fail in one or more of the 
qualities necessary to success. 

If this view of the source of the employer's gains be just, 
it is not possible to wrest profits to the benefit of the 
body of laborers. The employers may, indeed, be prevented 
from realizing them, by strikes and industrial disturbances ; 



39 2 POLITICAL ECONOMY. 

but no part of the profits which, they would otherwise have 
made, will, for that reason, go to any other class in the com- 
munity. On the contrary, the community as a whole, and 
the working classes in especial, will be worse off for the 
impairment or destruction of the employer's interest in pro- 
duction, i. e., his profits. 

Are there, then, no means by which the working class can 
operate, at once to reduce the amount going to the employing 
class as profits, and in the same degree to enhance their own 
wages ? I answer, yes : there are such means. These have 
been pointed out in paragraphs 310 to 314. In just so far a& 
the laboring classes, by their influence upon legislation or 
administration, or by their own direct action, contribute 
towards elevating the standard of the employing class, thus 
raising the lower limit of production in this respect, in just so 
far will they increase, not only the relative share, but the 
positive amount, coming to them in wages. It does not need 
to be said that treating employers as public enemies, levying 
industrial warfare upon them, concerting schemes to harass 
them and take them at every accidental disadvantage, render- 
ing it unsafe for them to undertake contracts on a large 
scale and over long periods of time, and subjecting them to 
insults and indignities, as so many labor leaders seem to think 
it a matter of class duty to do, is not a way to effect the 
desired result. Such courses must not only reduce the average 
standard of business ability, by driving out the ablest men, 
but must introduce into the employment of labor whole 
classes of persons of lower and still lower grades of efficiency, 
to the great and lasting injury of the community and of the 
working classes, first of all, last of all, most of all. 

481. Will the Machine Work?— So much for what I 
understand to be the main object of this industrial movement. 
A few words only will be needed regarding the suitability of 
the agencies to be employed. 

One might cherish grave doubts regarding the practicability 
of breeding a race of conductors of business, who, possessing 
energy, intelligence, forethought and resolution, will rather 
like to execute the legislation of a parliament of labor ; will 



WILL THE MACHINE WORK? 393 

cheerfully accept the condition of being ordered about by a 
committee of their own hands, or of a local council ; will be 
unhesitatingly ready to embark capital in enterprises over 
which they have practically no control. One might entertain 
grave doubts as to the capability of the working classes, after 
any course of education, however long, painful and costly, 
maintaining a parliament of labor which shall be competent 
to deal with concerns a hundred times as large, important and 
difficult as those which come before the American Congress, 
without making a mess of it, compared with which the muddle 
into which Congress manages to get our industry and 
finances would be clearness and order and system and light. 
But it is probably not necessary to go so far into the matter 
as to inquire what might come to pass should the Knights of 
Labor pursue their designs through a considerable period of 
time. It is in the highest degree improbable that the organ- 
ization itself could maintain activity long on such a scale as 
has been projected. 

The very vastness of the scheme foredooms it to failure. 
The attempt to embrace so much under a single rule ; to legis- 
late in detail for so many conflicting interests ; to regulate, 
from a central point, conditions of life and labor so widely 
diverse as those of city and of country, of east and of west, of 
agriculturist and of artisan, of common and of skilled labor, 
of the producer of materials and of him who uses those 
materials in the production of still higher classes of com- 
modities, must result in failure. The restiveness shown by 
many trade unions, the open revolt of some, the early estab- 
lishment of a rival Confederation, already intimate the essen- 
tial weakness of the scheme, at least if it is to be administered 
in the masterful spirit of the last two years. 

482; Is the Scheme " American " ? — Nor do I believe that? 
if it were left to the suffrage of the laboring classes in America 
themselves, one in twenty of those who were born upon the soil 
would vote to bring about such a subjection of the employing 
class to the will of their workmen or to a general parliament 
of labor. The American well knows that there is neither 
hardship nor indignity in working for another man, in hig 



394 POLITICAL ECONOMY. 

shop, at his task, with his tools, on his terms. He knows that 
industry, to be successfully conducted, must be controlled by 
its responsible head. He sees all around him men who have 
risen from the ranks of labor to become the conductors of 
business, no one hindering them, all applauding their efforts 
and rejoicing in their success. He knows that for himself 
and his children the way is open clear up to the top. The 
American workingman can be reasoned with, and that not on 
a low plane only ; he is capable of understanding and appre- 
ciating almost any consideration relating to the market ; his 
spirit is that of civility, reciprocity and fair play ; he cordially 
and intelligently accepts, in its full economic bearings, the 
maxim, " live and let live." Had it been left to our native 
population alone, not one of those violent and reckless attacks 
upon production and transportation, which have, within the 
past two or three years, shocked the whole industrial system 
and have come near to produce a general crisis of trade, would 
ever have taken place. 

IX. 

ATTACKS ON THE DOCTRINE OF RENT. 

483. Bastiat. — A doctrine of such far-reaching consequences 
as Ricardo's doctrine of Rent has not been allowed to stand 
without suffering many and vehement assaults. The French 
Bastiat has, in his eloquent and witty work, "The Harmonies 
of Political Economy," undertaken to demonstrate that Rent, 
proper, economic rent, does not exist ; that it is purely a fiction 
jointly maintained by the economists and the communists ; * 
that all which the landlord receives for the use of his land is 
nothing but the proper remuneration for the labor and capital 
expended in inclosing the land, providing means of access, 
draining, manuring and otherwise improving the soil, erecting 
buildings for sheltering the produce, housing the laborers, etc. 
Inasmuch as Bastiat's objections to Ricardo's doctrine were far 

* In stigmatizing this doctrine he continually joins together the names 
ot " Ricardo and Proudhon." 



CAREY ON RICA EDO. 395 

more strongly and clearly stated by the late Mr. Henry C. 
Carey, of Philadelphia, I pass at once to the consideration of 
the views of the latter. 

484. Carey. — Mr. Carey's attack is twofold. His first 
argument is founded on a "comparison of the cost and value of 
existing landed capital." To use his own phraseology, " There 
is not throughout the United States, a county, township, town, 
or city, that would sell for cost ; or one ichose rents are equal to 
the interest upon the labor and capital expended.'''''* And Mr. 
Carey draws what he regards as the logical inference from this 
alleged fact : " If we show that the land heretofore appro- 
priated is not only not worth as much labor as it has cost to 
produce it in its present condition, but that it could not be 
reproduced by the labor that its present value would purchase, 
it will be obvious to the reader that its whole value is due to 
that which has been applied to its improvement, "f 

Now, it appears to me J not only that this is not " obvious," 
but that something very like an Irish bull is to be found here. 
The trouble with this argument is its superabundance of proof. 
The effect is much the same as that which results from a super- 
abundance of powder in charging a gun. 

Had Mr. Carey been able to show that, in any case taken, a 
county, township, town, or city was worth exactly as much in 
labor as it had cost, the coincidence of amounts would at least 
have suggested, if it did not create a proper presumption to 
that effect, that the labor expended was the cause of the value 
existing ; but when Ricardo's critic asserts that any farm and 
any collection of farms, has cost more, often far more, than it 
is worth, he furnishes the means for his own refutation. 

Suppose the present value of a piece of land to be repre- 
sented by 100 units, while the value of the labor it has cost to 
"produce" the farms found thereon, is represented by 125. 
Now, says Mr. Carey, inasmuch as the land is not at present 
worth more than 100, while the labor invested in it was worth 

* Carey : The Past, Present and Future, p. 60. 
f Carey : Political Economy, vol. I., p. 102. 

% This discussion of Mr. Carey's propositions is abridged from my 
"work, "Land and Its Rent," published in 1883. 



39 6 POLITICAL ECONOMY. 

125, it is clear that nothing but the labor has entered to give 
value to the land ! 

But how so ? What has become of the 25 which was in 
excess of the 100 ? Lost, says Mr. Carey, since, " as labor is. 
improved in its quality by the aid of improved instruments, 
all previously accumulated capital tends to fall below its cost 
in labor."* 

Ah ! but if that 25 can be lost and has been lost, how can 
you show that another 25 has not been lost, and still another 
25, through the operation of the same cause ? How can you 
prove that proper economic rent does not enter ? How, indeed,, 
can you prove that the present value of the land is due, in any 
part whatever, to the labor expended in the past ? 

John Smith's barn has been broken into, over night, by a 
burglar who sawed a hole through the door to effect his entrance. 
Mr. Carey, in the interest of justice, appears next morning 
among the excited throng of neighbors, and produces a board 
taken from James Brown's woodshed, which, though not cor- 
responding to the guilty hole in size or shape, is yet large 
enough, as he explains, to allow just such a piece to be cut out 
of it, thus conclusively proving James Brown to have been 
the robber of John Smith's barn ! 

485 . How the Value of Agricultural Improvements should 
be Estimated. — An argument that breaks down thus, under 
the slightest strain, can not be worth further notice on its own 
account ; yet we may find matter of not a little economic inter- 
est in following out the question here raised, as to the relation 
between what Mr. Carey calls the cost of producing farms and 
the value of farms when " produced." 

First. To begin with, all statements regarding the amount so 
invested in any country or district are based on comparatively 
little information. The data are few and meager, even for 
making estimates. Accomplished statisticians, accustomed 
to deal with computations relating to agriculture, like 
Mr. Robert Giffen, Professor Thorold Rogers, or Sir 
James Caird, would scarcely presume to claim approximate 
accuracy for any estimates they might make regarding the 

♦Political Economy, vol. I., p. 35. 



CAREY ON RICA EDO. 397 

amount of labor involved in bringing even a limited agricul- 
tural region into its present state of productiveness. 

Second. Again, wholly in addition to the difficulty encoun- 
tered in estimating the amount of labor involved, would be the 
difficulty of computing the money value of that labor. While 
some oreat works of improvement are effected by bodies of 
hired laborers working through the year or through the agri- 
cultural season, most farm improvements are effected in the off 
season, when the wages of hired labor are very low, — perhaps 
only one-half what they would be at another period of the 
year ; and probably the greater part are effected by the labor 
of the owner or occupier of the land and his family, in frag- 
ments of the day which would not otherwise be utilized, or in 
portions of the year when little or nothing of the current work 
of the farm can be done. 

Third. The element of interest can properly be introduced 
into such computations only in respect to a very small propor- 
tion of agricultural investments. 

In general, where capital is applied, it is in the expectation 
of an immediate improvement of the productive power of the 
land, the annual increase of the produce being relied upon to 
furnish at least the annual interest upon the investment, so 
that, speaking broadly, in any comparison between the cost 
and the value of landed property, only the first cost of the 
improvements should be set against the ultimate value. 

There are cases, of course, where capital is applied to the 
land in the view alone of a distant increase of value. Here, 
within moderate limits of time, the inclusion of interest is not 
unreasonable. But even here, and even within comparatively 
brief periods, the application of the principle of geometric pro- 
gression, in the form of compound interest, is of very doubtful 
propriety. Geometrical increase is rarely attained and never 
long maintained in things human. Contemplating an actual 
instance of such increase within the field of industry, the most 
unreasonable expectation which can be formed concerning it, 
is that it will continue. That it should continue long, is not 
so much unlikely as impossible. 

Sir Archibald Alison, in his discussion of the British Sink- 



39 S POLIJ-ICAL ECONOMY. 

ing Fund, states that " a penny laid out at compound interest 
at the birth of our Saviour would in the year 1775 have 
amounted to a solid mass of gold eighteen hundred times the 
whole weight of the globe." So, doubtless, it might be shown 
that the value of Adam's first day's work in the Garden, properly 
compounded during six thousand years, would amount to 
more than the present value of all the lands of the world, and 
consequently that all the work that has been done since, in 
bringing the soil under cultivation, has been thrown away ! 

The incredibility of geometric increase through any con- 
siderable period of time can not be too strongly impressed upon 
the student of economics. The produce of a single acre of 
wheat, sown over and over for fourteen years, would cover 
all the solid land on this planet. The spawn of certain fish 
would suffice in even fewer years, if reproduction went on in 
geometrical progression, to fill to the brim the basin of 
every pond, lake, river, sea, and ocean. 

Hence we see the utter inconsequence of computations into 
which compound interest is allowed to enter, except in strict 
subordination to common-sense. Probably there is no way 
in which a man can so quickly and so conclusively show him- 
self unfit to be listened to, as by appealing to geometrical 
progression for the proof of an economic or social theory. 

Fourth. But the consideration of greatest importance in com- 
puting the cost of " producing " farms, is that, in general, 
agricultural improvements are compensated, and are expected 
to be compensated, upon the principle of those annuities in 
which a certain number of annual payments both yield due 
interest on the purchase money and extinguish the capital 
itself, as when a man for $1,000 (on which the normal interest 
would be $50 or $60) purchases the right to receive $120 a 
year for a certain term, with no claim on the principal there- 
after. 

Now, is this so, or is it not ? Let us satisfy our minds on 
this point ; for if the proposition just now stated is correct, it 
disposes effectually of the argument against the economic 
doctrine of rent derived from the fact of expenditures in 
" producing " farms. 



CAREY'S HISTORICAL ARGUMENT. 399 

That this proposition is correct, is, I think, proved con- 
clusively by the fact, abundantly established by English 
experience, that there are few classes of improvements known to 
agriculture which a tenant for 33 years loill not make at his 
own expense, notwithstanding the certainty that he will cease 
to enjoy the benefit of them at the expiry of his lease. 

Do not the several considerations adduced, and especially 
the last, take away all the force of this labored argument: 
against the doctrine of rent ? 

486. Mr. Carey's Historical Argument. — But Mr. Carey 
was not satisfied with one refutation of Ricardo's law. He 
attempted and, to the satisfaction of his disciples, achieved, 
a second demonstration of its falsity. That this subsidiary 
argument against the doctrine of rent should have been for a 
moment admitted, affords a striking proof of the weakness 
and vagueness with which economic questions, especially those 
affecting the land, have been discussed. 

" It will," Mr. Carey says,* " be perceived that the whole sys- 
tem (of Ricardo) is based upon the assertion of the existence 
of a single fact, namely, that, in the commencement of culti- 
vation, when population is small and land consequently 
abundant, the soils capable of yielding the largest return to 
any given quantity of labor alone are cultivated. 

" That fact exists, or it does not. If it has no existence, the 
system falls to the ground. That it does not exist, that it never 
has existed in any country whatsoever, and that it is contrary 
to the nature of things that it should have existed, or can exist^ 
we propose now to show. 

" We shall commence," he says, " our examination with the 
United States. Their first settlement is recent; and, the work 
being still in progress, we can readily trace the settler and 
mark his course of operation. If we find him invariably occu- 
pying the high and thin lands requiring little clearing and 
no drainage, those which can yield but a small return to labor, 
and as invariably traveling down the hills and clearing and 
draining the lower and richer lands, as population and wealth 

* Past, Present, and Future, p. 23. 



4°<> POLITICAL ECONOMY. 

increase, then will the theory we have offered be confirmed by 
practice, — American practice, at least. 

" If, however, we can thence follow him into Mexico and 
through South America, into Britain, and through France, 
Germany, Italy, Greece, and Egypt, into Asia and Australia, 
and show that such has been his invariable course of action, 
then may it be believed that when population is small and 
land consequently abundant, the work of cultivation is, and 
always must be, commenced upon the poorer soils; that, with 
the growth of population and wealth, other soils, yielding a 
larger return to labor, are always brought into activity, with 
a constantly increasing return to the labor expended upon 
them." 

487. All this is Irrelevant to the Doctrine of Bent.— 
I will not say, with Prof. Roscher, that Mr. Carey's lengthy 
exposition is " rank with inexact science and unhistorical his- 
tory." It does not matter a particle, so far as the validity of 
Ricardo's doctrine is concerned, whether Mr. Carey has cor- 
rectly apprehended or grossly misapprehended the facts of 
human history, in the respect under consideration. 

Let it be conceded that the order of settlement in all new 
countries is that which Mr. Carey has indicated, — the new- 
comers taking up light, dry, sandy soils, which will yield a 
quick return to the labor of the colonists, aided by their scanty 
capitals ; and that it is only when wealth has been in some 
measure accumulated, after the first severe struggle to main- 
tain existence, that deeper and richer, but cold and wet soils, 
are opened, the forests cleared, the swamps, rich with the 
vegetable mold of centuries, drained. What, pray, does all 
this prove, so far as the doctrine under consideration is con- 
cerned ? It is absolutely indifferent to the matter at issue. 

It is true that Ricardo assumed, for the purpose of illustrat- 
ing his doctrine, that the soils first cultivated, within any con- 
siderable country, were those most productive. It also appears 
from the context, that Mr. Ricardo really supposed that this 
was the historical order of occupation. Yet the economic law 
of rent has reference alone to lands under cultivation at 
the same time ; and would have precisely as much validity if 



CAREY'S HISTORICAL ARGUMENT. 4° I 

•every thing which Mr. Carey has contended for, regarding the 
actual order of settlement and cultivation, were conceded, as 
if the hypothesis of Ricardo were historically accurate. 

488. Is this History indeed Historical ? — I have said that 
the complete establishment of Mr. Carey's historical order 
would not effect the validity of Ricardo's law of rent ; and 
that, therefore, one might, for argument's sake, concede the 
accuracy of the narrative concerning the early settlement of 
Europe, Asia, and America, which occupies so large a portion 
of his treatises. 

But while the historical order of settlement is thus of no con- 
sequence as affecting the economic law of rent, it must be 
admitted that important consequences would follow the estab- 
lishment of the proposition that " the work of cultivation is 
and always must be commenced upon the poorer soils ; that, 
with the growth of population and wealth, other soils yielding 
a larger return to labor are always brought into activity; " or, 
as the author elsewhere expresses it, that the settler invariably 
travels down the hills, clearing and draining the lower and 
richer lands, as population and wealth increase. 

What are the economic consequences which, as we have said, 
would follow the establishment of Mr. Carey's proposition ? 
These : that, instead of the increase of population lowering 
the margin of cultivation, and thus enhancing the aggregate 
body of rents,* it would be shown to have the effect, by stim- 
ulating the cultivation of better lands, to throw out the poorer 
(the first cultivated) soils, and thus to raise the lower limit of 
cultivation, and thus at once to diminish the share of the prod- 
uce going as rent to the landlord, and to increase the average 
produce, per capita, of the community. Rents will still be 
determined by the Ricardian formula ; but the importance of 
rent as a factor in the distribution of wealth will be diminished. 

In view of the importance of these consequences, let us pro- 
ceed to examine Mr. Carey's sweeping assertions regarding 
the actual order of settlement and occupation, for the purposes 
of agriculture. Let us see whether this history be indeed his- 
torical or not. 

* See par. 257. 



4°2 POLITICAL ECONOMY. 

In the first place, we note that the detailed accounts relate, 
in the main, either to the settlement and cultivation of coun- 
tries in ages when military necessities were a controlling force, 
or else to the very earliest stages of settlement and cultivation 
of the land, under circumstances which made the needs of 
immediate subsistence peculiarly urgent, as in the new States of 
the American Union, eighty, sixty, forty years ago. 

It would take more time than we have at command to go 
through the history of the settlement of Britain, Italy, Greece, 
Germany, and other ancient countries, and attempt to analyze 
the influences which determined the selection of lands for 
habitation and cultivation. When we contrast the sites of 
nearly all ancient and medieval cities, built upon the tower- 
ing rock, with the utterly indefensible sites of our modern 
cities, we can well understand that not economic but political 
and military exigencies may have given a strong preference 
to high and rugged ground, even for agriculture, in the days 
of almost universal warfare. The crops, indeed, raised on 
such ground would neither be so ample, nor obtained with so 
little effort and sacrifice, as those which might have been 
raised in the fertile valleys below, but they would be in a 
less degree subject to be swept away by occasional forays of 
armed bands. 

Fortunately, we do not need to enter into an analysis 
involving so much time and labor, and perplexed by so many 
uncertainties regarding the facts with which we should have 
to deal. If the forces which in those days determined popu- 
lation to high and poor soils were exclusively or even pre- 
dominantly economic forces, we shall not fail to find them 
operating to control the occupation of new countries in these 
times of general peace. Let us then consider the course of 
settlement in the United States. Mr. Carey himself expresses 
his preference for investigation in this field. " Their first 
settlement," he says, " is recent, and, the work being still in 
progress, we can readily trace the settler, and mark his course 
of operation." * 

* Past, Present, and Future, p. 24. 



CAREY'S HISTORICAL] ARGUMENT. 403 

489. Take the Case of Ohio.— And, to further narrow the 
field, let us confine our view to the State of Ohio. This State 
is as favorable as any to the theory under consideration. 
" The early settlers," says Mr. Carey, " of Ohio, Indiana, and 
Illinois uniformly selected the higher grounds, leaving the 
richer lands for their successors." * 

The settlement of Ohio may be said to have been in 
progress all the time between 1802, when its inhabitants were 
fewer than 50,000, and 1832, when its population had reached 
1,000,000 : in progress in this sense, that not until the latter 
date had settlers found their way into every corner and 
county of the new State. 

Now let it be conceded that throughout this period Mr. 
Carey's statement regarding the course of occupation holds 
good substantially. I say, substantially, because to justify 
the assertion that the settlers "uniformly" selected the higher 
grounds would require a greater amount of particular and 
local knowledge than any one man ever possessed. 

How much, then, would there be in this fact, admitted for 
the sake of argument, which should be in contravention of 
the economic doctrine of rent ? These early settlers of Ohio 
were, in the first instance, necessarily controlled in their 
"location" by considerations relating to the transportation 
of their products and to communication with the settlements 
they had left behind. Now, advantages of situation, as we 
have before seen, enter just as fully into the net productive- 
ness of any tract of land, according to Ricardo's doctrine, as 
advantages arising from superior fertility. Even in illus- 
trating the origin of rent (par. 259) we assumed the exis- 
tence of a very productive tract, situated at so great a 
distance that it would not be occupied until cultivation had 
been driven to descend through several successive stages 
within the territory immediately surrounding the market. 

But, secondly, the early settlers of Ohio were largely 
compelled by the immediate exigencies of pioneer life to 
do something different from that which would have been 
the most advantageous had they possessed an ample store 

* Past, Present, and Future, p. 32. 



4°4 POLITICAL ECONOMY. 

of necessaries and of the utensils and materials of industry. 
New-comers must needs do, not what they would, but what 
they can ; they must raise a quick crop, by little labor ; and 
it is natural enough that they should generally seek the side- 
hill, which is self-drained, and the open country, which does 
not require clearing, and the thin, dry soil, which gives a 
speedy, though not a large return. 

They still seek that land which will be most productive 
under the circumstances in which they find themselves placed ; 
for, as Professor Johnston* has well said, that which would 
be rich land for a rich man may be poor land for a poor man. 

490. But the question I wish now to raise is, whether, when 
the first exigencies of pioneer life were passed, when some 
store had been accumulated, when population had become 
sufficiently dense to allow a reasonable degree of co-operation 
in labor, when time had been afforded to lay out roads and 
bridges and to perfect the means of transportation, when the 
capabilities and resources of the land had become thoroughly 
known, — whether then it remained true that cultivators in 
Ohio neglected the best soils for those of an inferior quality ? 

If not, the fabric so laboriously reared for assaulting the 
stronghold of the economists, tumbles to the ground, of its 
own weight. How much does it matter that the people of 
Ohio, while they were first spreading loosely over the State, 
took up lands as is asserted, unless it can be proved, or at 
least a strong presumption can be established, that they con- 
tinued to take up poorer soils, in preference to the best ? Mr. 
Carey asserts that the hypothetical order of settlement is 
" universally false " ; that is, it is false as applied not to one 
but to all stages of the history of any community. As this 
matter is important, let us formulate it somewhat rigidly. 

Let us suppose the possibly cultivable lands of Ohio to 
form seven distinct grades, 1 to 1, No. 1 being the poorest, 
No. 7 the richest. Let us divide the economic life of Ohio, 
beginning in 1802 and ending — when? into seven genera- 
tions, with continually increasing population. 

*A distinguished agricultural chemist of Great Britain, author of 
•' Notes on North America." 



CAREY'S HISTORICAL ARGUMENT. 4°5 

Now, according to the view we are considering, generation 
No. 1, the first settlers, will take up lands No. 1, the poorest 
of all ; generation No. 2 will take up lands No. 2, the next to 
the poorest ; generation No. 3 will take up lands No. 3, and 
so on. 

This, or something very like it, must take place, or our 
" law " breaks down ; for should generation No. 3, say, have 
the presumption to take up lands No. 6, and generation No. 
4 be thereby encouraged to take up lands No. 7, why then 
generation No. 5 will be compelled to take up lands No. 5, 
that is, lands poorer than those which had been brought in by 
the two generations preceding, while generation No. 6 will be 
driven to take up lands No. 4, far down on the scale of 
fertility ; and generation No. 1, the flower of civilization, will 
actually have to "decline upon" lands No. 3, which, accord- 
ing to Mr. Carey, generation No. 3 should, in conscience, have 
taken up. In other words, we should have cultivation driven 
down to inferior soils, a state of things respecting which 
Ricardo's critic declares that it not only never has existed in 
any country whatsoever, but that it is contrary to the nature 
of things that it should have existed or can exist. 

In view of such possible results, what an appalling respons- 
ibility rests upon the people of any generation in the matter 
of not taking up any better land than they ought ! In the 
first place, think what a degree of virtue it requires, that they 
should deliberately deny themselves the enjoyment of the 
really best land around them, in order that the coming gener- 
ations, with increasing numbers, should have the privilege of 
first occupying these, as Mr. Carey says they must do! Even 
more remarkable than this, think of the degree of intelligence 
that is required to point out to the men of any generation 
just the share of the lands of the State which Mr. Carey's 
theory will permit them to occupy, they being necessarily 
ignorant as to what the future population of the State is to be, 
or through how many generations or centuries the increase 
of population upon the territory is to be continued ! 

491. But let us return to Ohio. We have seen what is 
required to make this " historical law " true. How far do 



4°6 POLITICAL ECONOMY. 

the probabilities of the case favor the application of that 
law throughout the settlement of that State ? 

We may believe that there were, in Ohio, in 1832, when the 
population was 1,000,000, about 4,000,000 acres of improved 
land in farms. By 1850, when the population had risen to 
2,000,000, these 4,000,000 acres had become 10,000,000. Did 
the addition thus made to the inclosed and improved lands of 
the State include a fair proportion of the best lands within its 
limits, or were the new lands, also, thin, dry, sandy soils, 
only not quite so poor as those brought in between 1802 and 
1832, — soils giving little root to grasses or to grain, but 
raising a small crop easily and quickly ? Unless the latter 
was the case, this great historical law becomes little better 
than arrant nonsense. 

There is a popular belief throughout the Eastern States Of 
this Union, that, in the eighteen years covered by this period, 
— 1832-50, — there was an immense amount of "clearing" 
done in Ohio ; and the virtues of the " pioneer's ax " have 
been celebrated in song and story. Is this all a mistake ? Or, 
if the people of Ohio really did cut down the primeval 
timber over thousands of square miles, did they, as they ought, 
take pains to cut down only timber which grew over com- 
paratively poor soils, so as not to interfere with the rights 
vested in unborn generations by Mr. Carey's " law " ? 

Between 1850 and 1880, again, the population of Ohio in- 
creased to 3,000,000, and the number of acres of improved lands 
rose to 18,000,000. Were the 8,000,000 acres improved for 
the first time during this period, all, or substantially all, of a 
quality next above those previously brought in, but still below 
the best ? Did this added territory embrace lands only a 
little less thin, a little less shallow, than those occupied in 
1850? Did this vast annexation still leave the really good 
lands of the State uncultivated, only to be improved when the 
population shall reach 5,000,000 or 10,000,000? 

492. I do not care to contest Mr. Carey's assertion that the 
first generation of settlers in any American State have spread 
themselves loosely over the soil, picking out the spots which 
offered the greatest facilities for the transportation of produce 



CAREY'S HISTORICAL ARGUMENT. 407 

and for communication with the older settlements, perhaps 
giving a certain preference to naturally cleared, self -drained 
land. But that the second generation, in any American State, 
north of Mason and Dixon's line at least, have shrunk from 
the real problem of their economic life, have failed to grapple 
with the obstacles which withstood their acquisition of the 
richest resources of nature, have neglected to subdue the soil, 
the best soil they could find, with ax and spade, strenuously, 
manfully, with incessant toil, with unflinching courage, I, for 
one, do not believe ; and Mr. Carey has not adduced a scintilla 
of evidence to prove a proposition so contrary to all we 
have ever learned of the character and life of the Western 
people. In the absence of any such statistical demonstration, 
common fame and common sense give the flattest contradic- 
tion to this hypothesis. 

With this we may safely leave the argument against the 
Ricardian doctrine of rent. The person who denies the truth 
of the Ricardian law in effect declares that men habitually 
rent or sell highly fertile and comparatively infertile fields, 
rich corn lands and mountain pastures, at the same price ; 
that men habitually rent or sell lands near a market at the 
same price with lands the most distant from the market. If 
he does not mean to assert this, he does not in the smallest 
degree traverse the path of Ricardo's argument. If he does 
mean to assert this, he puts himself on the level of the 
person who should assert that men habitually sell two bushels 
or ten bushels of wheat, indifferently, at one and the same 
price. 

X. 

THE NATIONALIZATION OF THE LAND. 

493. The Law of Rent Re-stated.— We have seen what is 
the nature of Rent. It represents the surplus of the produce 
over the cost of cultivation on the poorest lands actually con- 
tributing to the supply of the market at the time. 

We saw (par. 262-4) that, conceding the private owner- 



4°8 POLITICAL ECONOMY. 

ship of land, rent is merely a question between landlord and 
tenant ; that so far as economic forces are concerned, rent 
must remain in the hands of the landlord ; that, setting 
violence aside, it can only come into the hands of the tenant 
by gift from the landlord ; that, were it, by virtue of the 
landlord's generosity, to reach the tenant, it would, so far as 
economic forces are concerned, go no further. It could only 
be carried to the agricultural laborer or to the consumer of 
agricultural produce, by another gift or series of gifts. 

494. The Equities of Rent, as between Landlord and 
Tenant.— So much for the economics of rent ; let us look a 
moment at the equities of it. 

Certainly, as between the landlord and the tenant, the latter 
can set up no claim to any portion of rent. This is shown in 
the following way : It is, as we have seen, of the very essence 
of rent that it represents, and is measured by, the surplus of 
produce over the cost of cultivation on the poorest (or most 
distant) lands under cultivation for the supply of the same 
market. Now, these poorest or most distant lands have occu- 
piers who must be presumed to be industrially, and, if you 
please, morally, just as meritorious as those who cultivate the 
better lands or the lands nearer the market. The several 
classes of tenants are only put on an equality when rent is 
exacted according to the Ricardian formula. It would clearly 
be inequitable that one body of occupiers should receive back> 
in the price of their products, only the actual cost of cultiva- 
tion, while another should receive large sums in addition to 
this, as would be the case were rents to be remitted. 

495. As between Landlord and the Agricultural Laborer. 
— In the same way it may be shown that the agricultural 
laborers on lands which bear a rent have no claim, in equity > 
to any portion of that rent. Why should they receive any 
more for their services than the laborers who cultivate the no- 
rent lands ? 

Clearly, then, as against either the tenant or the agri- 
cultural laborer, the landlord has an easy case. He can 
prove that neither of the two has any claim whatever to any 
part of what he receives as rent. 



THE EQUITIES OF RENT. 409 

496. As between the Landlord and the Community at 
Xarge.— But suppose the issue to be raised between the land- 
lord and the whole community, can the acquisition by indi- 
viduals of the surplus of the produce above the cost of 
cultivation on the poorest soils, be so successfully defended on 
grounds either of political equity or of political expediency ? 

As this question has within the past few years become a 
"burning" question, I think it but right to present the 
argument of those who urge that " the unearned increment of 
land " should go to the State and not to individuals. This 
argument can not be better presented than in the language of 
John Stuart Mill, who, in his later days, became President of 
the English Land Tenure Reform Association, whose pro- 
fessed object was to agitate this question. 

497. Mr. Mill's Argument.— -" Suppose," says Mr. Mill, 
" that there is a kind of income which constantly tends to 
increase without any exertion or sacrifice on the part of the 
owners, these owners constituting a class in the community 
whom the natural course of things progressively enriches, 
consistently with complete passiveness on their own part. In 
such a case there would be no violation of the principles on 
which private property is founded, if the State should 
appropriate this increase of wealth, or any part of it, as it 
arises. This would not properly be taking any thing from any 
body ; it would merely be applying an accession of wealth, 
created by circumstances, to the benefit of society, instead of 
allowing it to become an unearned appendage to the riches of 
a particular class. 

" Now this is actually the case with rent. The ordinary 
progress of a society which increases in wealth, is at all times 
tending to augment the income of landlords ; to give them 
both a greater amount and a greater proportion of the wealth 
of the community, independently of any trouble or outlay 
incurred by themselves. They grow richer, as it were, in their 
sleep, without working, risking or economizing." 

In the paper from which the foregoing paragraphs are 
extracted, Mr. Mill expressly excepted the present value of 
the land in possession of individuals at the time the system of 



41° POLITICAL ECONOMY. 

the public acquisition of the increment of the land should go 
into effect. Such an act should, in his view, have reference 
only to future increase. 

In another place, while expressing a general respect for the 
rights of property, Mr. Mill proceeds : 

" Some people ask, But why single out the land ? Does not 
all property rise in value with the increase of prosperity ? I 
answer, No. All other property fluctuates in value, now up, 
now down. I defy any one to show any kind of property, not 
partaking of the soil, and sufficiently important to be worth 
considering, which tends steadily upward, without any thing 
being done by the owners to give it increased value. So far 
from it, that the other of the two kinds of property that 
yield income, namely, capital, instead of increasing, actually 
diminishes in value as society advances. The poorer the 
country, or the further back we go in history, the higher we 
find the interest of money to be. Land alone — using land as 
a general term for the whole material of the earth — has the 
privilege of steadily rising in value from natural causes ; and 
the reason is that land is strictly limited in quantity ; the 
supply does not increase to meet the constant increase of 
demand . . . 

"Well would it have been if this diversion of the public 
wealth had been foreseen and guarded against long ago ; let 
us at least prevent any more gigantic fortunes* from being 
built up in a similar manner. The Association claims for the 
State the right to impose special taxation upon the land, 
equivalent to its special advantage." 

"Those countries are fortunate," remarks Mr. Mill, "or 
would be fortunate, if decently governed, in which, as in a 

* "If the Grosvenor, Portman and Portland estates belonged to the 
municipality of London, the gigantic incomes of those estates would 
•probably suffice for the whole expense of the local government of the capital. 
But these gigantic incomes are still swelling ; by the growth of London 
they may again be doubled in as short a time as they have doubled 
already." — Ibid. Prof. Adolph Wagner, of the University of Berlin, 
advocates the assumption by the State of all urban real estate, while 
deprecating the extension of the principle to agricultural land. 



FEUDAL BURDENS ON LAND. 4" 

great part of the East, the land has not been allowed to become 
the permanent property of individuals, and the State conse- 
quently is the sole landlord. So far as the public expenditure 
is covered by the proceeds of the land, those countries are 
untaxed, for it is the same thing as being untaxed to pay to 
the State only what would have to be paid to private landlords 
if the land were appropriated. 

" The principle that the land belongs to the Sovereign, and 
that the expenses of government should be defrayed by it, is 
recognized in the theory of our own ancient institutions. The 
nearest thing to an absolute proprietor whom our laws know 
of, is the freeholder, who is a tenant of the Crown, bound 
originally to personal service, in the field or at the plow, 
and when that obligation was remitted, subject to a land tax 
intended to be equivalent to it." 

498. The Feudal Burdens of Land in England. — In the 
paragraph last quoted, Mr. Mill contemplates the feudal obliga- 
tions of the tenant by military and other service as approximately 
the equivalent of an annual rent, which would be made, rudely 
indeed, to increase with the increasing value of land due to 
the growth of population and the progress of trade and manu- 
factures. The chief of these obligations, as formulated by law 
and custom in England, are thus stated by Sir Edward S. Creasy, 
in his work on " The English Constitution." 

The king, as feudal lord of his barons, and other military 
tenants, had a right to exact from them military service, or a 
pecuniary payment in lieu thereof ; and it seems to have been 
optional with the king to claim the money, whether the vassal 
wished to serve in person or not, and even to exact both 
money and personal service. This war tax is called escuage 
or scutage, and the constant wars and troubles of the times 
always furnished a ready pretext for demanding it. Other 
exactions of money payments, under the name of aids, were 
continually practiced. Besides these, the heir, on succeeding 
to his estate, was required to pay a sum of money to the lord, 
under the title of a " relief." If the heir was a minor, the 
lord took possession of the land, as guardian, and used or 
abused it as he pleased, till the heir obtained his majority. 



412 POLITICAL ECONOMY. 

Even then the heir was obliged to pay a fine on suing out his 
livery, that is, on obtaining the delivery of the land from his 
guardian to him. The lord also had the right of nominating 
and tendering a wife to his male ward, or a husband to his 
female ward. And if the ward declined to marry the person 
so selected, the ward forfeited to the lord such a sum of money 
as the alliance was considered worth. The lord was entitled 
to a fine upon alienation : that is, if the tenant disposed of 
the land, or any part of it, to any third party. If the tenant 
died without heirs the land reverted to the lord. This was 
termed escheat (par. 573), and, as the right of devising real 
property did not exist in England after the Conquest, till 
Henry VIII's time, escheats were numerous. The lord also 
claimed to take back the land whenever the tenant committed 
any of a numerous list of crimes or acts of feudal misconduct. 
Such criminality or misconduct on the tenant's part was held 
to work a forfeiture. 

499. Composition for the Feudal Burdens Upon Land.— 
On the restoration of Charles II., the land-owning class secured 
their release from the strictly feudal burdens, the considera- 
tion received by the Crown being solely an excise upon beer; 
and thus the vast possibilities of revenue to be derived from 
the composition of the feudal obligations of the landowning 
class were sacrificed. In the revolution of 1688, however, 
there was, as Mr. Mill notes, a reaction against this sacrifice 
of the rights of the public revenue. Indeed, the revolution 
of 1688 was, in Mr. Mill's view, "a revolution made by the 
towns against the country gentlemen. One of the fruits of 
it was a tax on the land of four shillings in the pound, which, 
at that time, may have been an equivalent for the burdens 
which had been taken off the landlords." 

In 1692, accordingly, the lands of England were valued for 
the purposes of the land tax. 

This land tax was to be a tax, not upon the community, not 
upon raw produce, not upon commercial agencies and manufac- 
turing operations, but solely a tax upon landlords, in reduction 
of their rents : a resumption by the State, for its own benefit 
and for the corresponding relief of other classes, of a portion 



THE LAND TAX. 4*3 

of the rents arising from the increase of population and the 
progress of trade and manufactures. 

The following is Mr. Ricardo's statement of the incidence 
of a land tax : 

" A land tax, levied in proportion to the rent of land,* and 
varying with every variation of rents, is, in effect, a tax on 
rent, and, as such a tax will not apply to that land which yields 
no rent, nor to the produce of that capital which is employed 
on the land with a view to profit merely and which never pays 
rent, it will not, in any way, affect the price of raw produce, 
but will fall wholly on the landlords." 

But if the revolution of 1688 was, indeed, as Mi*. Mill con- 
ceives it, a revolt of the towns against the country gentlemen, 
the force of that movement was soon exhausted. The land- 
owners resumed control of English legislation ; the valuation 
of 1692 has remained to this day as the basis of the land tax, 
while the rate of that tax was in 1798 made permanent at 4 
shillings in the pound on the valuation of that date. It was by 
this series of acts that the right of the State to participate in the 
increase of the rental value of the lands of the kingdom was 
relinquished, in consideration of an annual payment, forever, 
of about £2,000,000. 

500. Mr. Cobden's Denunciation. — It was to this relin- 
quishment of the rights of the revenue by parliaments com- 
posed of country gentlemen, for the benefit of landlords, at 
the expense of the general community, that Richard Cobden 
alluded in his somewhat threatening speech of December 17, 
1845. 

" I warn ministers and I warn landowners and the aristoc- 
racy of this country against forcing upon the attention of the 
middle and industrious classes the subject of taxation. 

" If they make it understood by the people of this country how 
the landowners here one hundred and fifty years ago deprived 
the sovereign of his feudal rights over them; how the aristocracy 
retained their feudal rights over the minor copyholders : how 

* On the other hand, Mr. Ricardo says, " If a land tax be imposed on 
all cultivated land, however moderate that tax may be, it will be a tax 
on produce, and will therefore raise the price of produce." 



414 POLITICAL ECONOMY. 

they made a bargain with the king to give him four shillings in 
the pound upon their landed rentals, as a quit charge for having 
dispensed with these rights of feudal service from them ; if 
the country understand, as well as I think I understand, how 
afterwards this landed aristocracy passed a law to make the 
valuation of their rental final, the bargain originally being that 
they should pay four shillings in the pound of the yearly 
rateable value of their rental, as it was worth to let for, and 
then stopped the progress of the rent by a law making the 
valuation final; that the land has gone on increasing ten-fold 
in many parts of Scotland, and five-fold in many parts of 
England, while the land tax has remained the same as it was 
one hundred and fifty years ago ; ... if they force these 
things to be understood, they will be making as rueful a bargain 
as they have already made by resisting the abolition of the 
Corn Law." 

501. Mr. Mill's Land-Tenure Reform Agitation. — What 
Mr. Cobden thus threatened in 1845, Mr. Mill undertook about 
1870 : an agitation of the whole question of taxation, and an 
active inquiry into the right of the landlord class to receive 
the progressive increase of rents. 

The following is an extract from the programme of the 
Land-Tenure Reform Association, of which Mr. Mill was 
President : 

"(IV.) To Claim for the benefit of the State, the Intercep- 
tion by Taxation of the Future Unearned Increase of the Rent 
of Land (so far as the same can be ascertained), or a great 
part of that increase, which is continually taking place with- 
out any effort or outlay by the proprietors, merely through 
the growth of population and wealth ; reserving to owners 
the option of relinquishing their property to the State, at the 
market value which it may have acquired at the time when 
this principle may be adopted by the Legislature." 

502. What Shall be Said of the Equity of this Proposal? 
— In their appeal alike to history and to political equity, I 
can not see that the Land-Tenure Reformers, under Mr. Mill's 
leadership, were wrong. That (1), by the original Teutonic 
constitutions the land belonged to the tribe or the community,, 



THE UNEARNED INCREMENT. 4*5 

and not to individuals, and was generally cultivated and en- 
joyed in common or by rotation of tenure, that (2), even when 
permanence of individual possession was established and titles 
were created, the occupation of land was charged with duties 
to the State, both of fiscal contribution and of personal ser- 
vice, which were onerous, and which tended to increase as the 
needs of the State increased and as the rental value of the 
land increased ; that (3), in Europe, generally, when the oc- 
cupiers of land were released from these duties to the State, it 
was upon a consideration wholly inadequate or upon no con- 
sideration at all ; while that release was conceded by the land- 
owning class, as the ruling class, to themselves as parties in 
interest, in a way which in this age would be regarded as cor- 
rupt ; and that (4), the unqualified ownership of land, thus 
established, enables the land-owning class to reap an unearned 
benefit, at the expense of the community : these propositions 
seem to me indisputable. 

503. What of its Expediency? — As a measure of politi- 
cal expediency, however, the scheme of the assumption by the 
State of the increment of land, appears to me fatally defec- 
tive. 

In the first place, it must be observed that a large part, at 
best, of the possible mischief has already been done, beyond 
repair, in the surrender of the rights of the community to 
individuals. As that surrender is now generations, even cen- 
turies old, and as much of the land has changed owners, some- 
times over and over again in the interval, many of the present 
possessors having paid the full price of to-day, in good faith, 
under existing arrangements which were fully sanctioned by 
law, it would be simple robbery* for the State to reassert its 
interest in the land without fully indemnifying owners. This 
the English Land-Tenure Reform Association, in their pro- 
gramme already quoted, fully acknowledged. They proposed 
tc " reserve to owners the option of relinquishing their prop- 
erty to the State at the market value which it may have 

* It will be seen from what follows that it is only in this respect that 
Mr. Henry George's proposal differs from that of Mr. Mill. 



41 6 POLITICAL ECONOMY. 

acquired at the time when this principle may be adopted by" 
the Legislature." 

It is only, then, to the future increase in the value of land 
that this scheme would apply. Such a limitation of its scope 
would not only greatly reduce the importance of the benefit to 
be derived by the State in every community, but would deprive 
it of all significance in many communities* where land 
has doubtless already reached its maximum value. 

But, secondly, government could, by the confession of the 
Association, not realize through this scheme all that is left 
after the foregoing deduction has been made. Inasmuch as 
the State is bound to be very careful and solicitous not to do 
injustice, the appraisement of the present rental value, or 
capital value of estates, in the administration of such a scheme, 
must be very conservative. This, again, is admitted by Mr. 
Mill. " It is not necessary," he says, " to enforce the rights 
of the State to the utmost farthing. A large margin should 
be allowed for possible miscalculation." f Yet such an allow- 
ance would diminish, by just so much, the inducement to the 
State to assert its interest in the lands now held by individuals. 

504. How About Depreciating Property ?— Thirdly, it is 
clear, that the State, if it will claim the benefit of all increase 
in the value of lands resulting from the growth of demand, 
due to general causes affecting the increase of the community 
in numbers or productive power, is bound in equity, to make 
good all losses arising from the decrease in the value of lands 
which results from the decline of demand due to general causes 
acting in the opposite direction. If the so-called proprietor 
of land is not to be allowed to reap any gain not brought 
about by his own exertions, he must, in simple fairness, be 
protected against losses which no vigilance or effort of his 

*For example, all over England, Ireland and Scotland, agricultural 
rents have been steadily falling through the past ten years or more. So 
it has been in many of the States of the American Union. 

f No one who has studied with care, as Mr. Mill had done, the question 
of "Unexhausted Improvements" as an element in tenant right, could 
fail to appreciate the appalling difficulties which would attend the 
appraisement of real estate for a purpose like that in view of the Land- 
Tenure Reform Association. 



FALL IN RENTS. 4*7 

could have averted. "Heads I win: tails you lose," is not a 
game at which the State can, in fairness or decency, play with 
its citizens. 

The range of this consideration is not a narrow one. In 
almost every community, even the most nourishing, the 
phenomenon of declining values is seen side by side with that of 
rising values. Notwithstanding the large increase during the 
past twenty years in the aggregate value of real estate in the 
city of Boston, for instance, there are extensive sections where 
houses will not bring any thing near their price at the begin- 
ning of this period. Now if, in 1867, the principle of collect- 
ing for public uses all excess of rents above those prevailing 
at that date, or, at the option of the owner, paying the capital 
value of the property and assuming the ownership, had been 
adopted by competent authority in and for the city of Boston, 
the city would now be paying to thousands of property 
holders considerable annuities, representing deficiencies in 
rental value which have occurred since 1867, or else it would, 
which is more probable, have come into possession of street 
on street of houses and stores whose owners preferred to sur- 
render their property at their capital value in 1867. 

505. Fourthly : — Practical objections might be multiplied ; 
but it will be sufficient to refer to the official jobbery, trick- 
ery, and corruption which would be involved in the manage- 
ment by the state of all the landed property of the country, 
either in an attempt to administer it productively, or in the 
occasional re-valuation and re-leasing of it in parcels to suit 
the occasions of individuals. To my view, the condition of 
things that would result would be simply intolerable. "When 
we contemplate the history of even petty transactions of a 
like character, on the part of our national government, or of 
the several state governments, it seems impossible to believe 
that any inducement should ever draw the American people, 
traditionally jealous of the enlargement of governmental 
powers, on to the adoption of such a measure. 

MR. HENRY GEORGE'S CRUSADE. 

506 . The proposals for the nationalization of the land, offered, 



41 8 POLITICAL ECONOMY. 

as we have stated, by Mr. Mill in 1870, while they received 
much serious consideration from economists and publicists, 
aroused no popular excitement. In 1879, Mr. Henry George, 
then of San Francisco, published a work entitled " Progress 
and Poverty," which, about 1883, began to command public 
attention in an extraordinary degree. During and since that 
year, the agitation of the question of the public or private 
ownership of the soil, has gone forward with increasing 
vehemence, until now (1887), both in Great Britain and in the 
United States, large bands of enthusiastic disciples, call them- 
selves by the name of the author of " Progress and Poverty.'* 

Mr. George's practical proposals require but brief notice. 
They differ from those of Mr. Mill* only in the single respect 
that, while Mr. Mill, like an honest man, contemplated the 
full compensation of the existing body of owners of land, 
according to the value i of their several properties, at the time 
the scheme should be adopted and proclaimed by adequate 
authority, Mr. George repudiates any such obligation 
on the part of the State, and proposes to confiscate the entire 
value of the land. The attempted justification for this 
precious price of villainy is found in the mere, bald assertion 
of Mr. Henry George, that the State never had the power to 
give a title to any par cel of land_ to_an y person^ for any 
purpose ; and that, therefore, all landt itles are, from the 
beginning, void. TJnderrthis scheme, alike the man who 
cultivates ,broad tracts for profit, and the man who occupies a 
corner with his humble dwelling ; the man who inherited land 
from his ancestors, and the man who has bought land with 
the savings from years of labor, would find themselves dis- 
poned without redress or recompense. Even where the 
government itself sold the land and put the proceeds into its 
treasury, Mr. George would have the government confiscate 
the property, Avithout refunding the price ! 

Mr. George is, indeed, good enough to say that he will 

* Neither Mr. Mill nor Mr. George proposes that the title of land shall 
pass to the state. They agree on the plan of advancing the taxes upoa 
the land so as to confiscate the successive increments of value. 



MR. GEORGE'S PROPOSALS. 4*9 

allow improvements on the land to remain the property of thos« 
who made them, although, as he justly remarks, improvements 
made by any person on land not his own, appertain to the 
land and passfwith it. ThT gratification naturally felt at this 
magnanimous proposal is, however, qualified by the reflection 
that, if the sovereign authority of a nation, with the full con- 
currence and glad consent of all its citizens, generation after 
generation, can not, as Mr. George assures us, avail to give 
the faintest title to the smallest parcel of land, possibly Mr. 
George's single permission to the unhappy intruder to retain 
possession of his improvements might not prove conclusive. 
In another generation, or perhaps another year, some new 
apostle of a regeneratedjhumanity might become a candidate 
for the Mayoralty of New York, on the issue of confiscating 
land improvements. 

So much for Mr. George's practical proposals. I will not 
insult my readers by discussing a project so steeped in infamy. 

507. Mr. George's View of Bent.— In supporting these 
proposals, however, Mr. George has put forward a theory of 
the relation of Rent to the other shares of the product of 
industry, which has imposed upon so many persons that I deem 
it worth while to state and refute it here. Mr. George's view 
of Rent, as a factor in distribution, affords the key to the col- 
location of the words, Progress and Poverty, in the title of 
his work. The subject of that work is Rent ; and Progress 
and Poverty is, in his opinion, an appropriate title for a treat- 
ise on that subject, inasmuch as, according to his theory, all 
social and industrial progress does, so long as land remains 
private property, that is, so long as rent is paid to any but the 
State, not only naturally but necessarily and inevitably, cause 
poverty to increase, at a constantly accelerating ratio. To 
use his own language : " Irrespective of the increcm-J)JLjpopu- 
lation, the effec^o£^mp^v^en^^n^^^ds of producti on and 
exchange is to increase rent." The proof of this proposition 
is as follows : — 

"Demand is not a fixed quantity that increases only as 
population increases. In each individual it rises with his 
power of getting the things demanded. . . . 



420 POLITICAL ECONOMY. 

" The amount of wealth produced is nowhere commensurate 
with the desire for wealth ; and desire mounts with every 
additional opportunity for gratification. 

" This being the case, the effect of labor-saving improve- 
ments will be to increase the production of wealth. Now, for 
the production of wealth, two things are required, labor and 
land. Therefore, the effect of labor-saving improvements 
will be to extend the demand for land, and wherever the limit 
of the quality of land in use is reached, to bring into cultiva- 
tion lands of less natural productiveness, or to extend cultiva- 
tion on the same lands to a point of lower natural productive- 
ness. And thus, while the primary effect of labor-saving 
improvements is to increase the power of labor, the secondary 
effect is to extend cultivation, and, where this lowers the mar- 
gin of cultivation, to increase rent. ... 

" Thus, where land is entirely appropriated, as in England, 
or where it is either appropriated or is capable of appropria- 
tion as rapidly as it is needed for use, as in the United States, 
the ultimate effect of labor-saving machinery or improvements 
is to increase rent, without increasing wages or interest. 

" It is important that this be fully understood, for it shows 
that effects attributed by current theories to increase of popu- 
lation are really due to the progress of invention, and explains 
the otherwise perplexing fact that labor-saving machinery 
everywhere fails to benefit laborers." 

And he concludes, after repeating and further illustrating 
this view of the effect of productive improvements and inven- 
tions, with the following italicized proposition : " "Wealth, in 
all its forms, being the product of labor applied to land, or 
the products of land, any increase in the power of labor, the 
demand for wealth being unsatisfied, will be utilized in pro- 
curing more wealth, and thus increase the demand for land." 
And so, to use his own phrase, labor can not reap the benefits 
which advancing civilization brings, because they are " inter- 
cepted," that is, intercepted by rent. 

That it may not be supposed that I am misrepresenting Mr. 
George, or omitting any qualification of his propositions, T 
quote another extended paragraph. 



MR. GEORGE'S VIEW OF RENT. 42 1 

" Land being necessary to labor, and being reduced to pri- 
vate ownership, every increase in, the productive power of labor 
but increases rent, — the price that labor must pay for the oppor- 
tunity to utilize its powers; and thus all the advantages gained 
by the march of progress go to the owners of land and wages 
do not increase. Wages can not increase ; for, the greater 
the earnings of labor, the greater the price that labor must 
pay out of its earnings for the opportunity to make any earn- 
ings at all. The mere laborer has thus no more interest in the 
general advance of productive power than the Cuban slave 
has in advance in the price of sugar. And just as an advance 
in the price of sugar may make the condition of the slave 
worse, by inducing the master to drive him harder, so may the 
condition of the free laborer be positively, as well as relatively, 
changed for the worse by the increase in the productive power 
of his labor. For, begotten of the continuous advance of rents, 
arises a speculative tendency which discounts the effect of 
future improvements by a still further advance of rent." 

508. The Second Count of the Indictment The last sen- 
tence introduces Mr. George's second count in his arraignment 
of rent, as the great social criminal. 

Please carefully to note the point. The necessary, immedi- 
ate and direct effect of any addition, from whatever source, 
to the productive power of labor, is to increase rents by just 
that amount, so that nothing is left to go either into enhanced 
wages or enhanced profits, the landlord taking the entire 
increase, whatever that may be. 

But now another force enters, actually to deplete the 
already starving laborer. This is the speculative advance in 
land, owing to the expectation of further increments of value 
at the expense of the community. 

" We have," says Mr. George, " hitherto assumed, as is gen- 
erally assumed in elucidations of the theory of rent, that the 
actical margin of cultivation always coincides with what may 
be termed the necessary margin of cultivation, — that is to 
say, we have assumed that cultivation extends to less produc- 
tive points only as it becomes necessary from the fact that 
natural opportunities are at the more productive points fully 



422 POLITICAL ECONOMY. 

utilized. This, probably, is the case in stationary or very 
slowly progressing communities ; but in rapidly progressing 
communities, where the swift and steady increase of rent 
gives confidence to calculations of further increase, it is not 
the case. In such communities, the confident expectation of 
increased prices produces, to a greater or less extent, the effects 
of a combination among land-holders, and tends to the with- 
holding of land from use, in expectation of higher prices, thus 
forcing the margin of cultivation farther than required by the 
necessities of production." 

509. The Third Count.— But this is not the end of the mis- 
chief attending the private ownership of land. We have now 
the third and final count in this arraignment. The specula- 
tive holding of land, just described, becomes, in turn, the 
cause of incessant industrial disturbance, and of those great 
periodic convulsions of production and trade which involve 
the laboring classes, poor, inert, and unapt to travel or to 
change of occupation, in the deepest distress. 

" Production," says Mr. George, in explanation of an 
assumed industrial crisis, " has somewhere been checked, and 
this reduction in the supply of some things has shown itself 
in cessation of demand for others, the check propagating 
itself through the whole framework of industry and exchange. 
Now, the industrial pyramid manifestly rests on the land. 

" The primary and fundamental occupations, which create 
a demand for all others, are evidently those which extract 
wealth from nature, and hence, if we trace from one exchange 
point to another, and from one occupation to another, this 
check to production, which shows itself in decreased purchas- 
ing power, we must ultimately find it in some obstacle which 
checks labor in expending itself on land. 

" And that obstacle, it is clear, is the speculative advance in 
rent, or the value of land, which produces the same effects as 
(in fact, it is) a lock-out of labor and capital by landowners. 
This check to production, beginning at the basis of interlaced 
industry, propagates itself from exchange point to exchange 
point, cessation of supply becoming failure of demand, until, 
so to speak, the whole machine is thrown out of gear, and the 



MR. GEORGE'S VIEW OF RENT. 423 

spectacle is everwhere presented of labor going to waste 
while laborers suffer from want." 

510. This concludes Mr George's arraignment of private 
property in land.* If these successive counts can be sus- 
tained, he is fully borne out in his conclusion that " the neces- 
sary result of material progress — land being private property 
— is, no matter what the increase in population, to force labor- 
ers to wages which give but a bare living ; " or, as he else- 
where expresses it, that " material progress does not merely 
fail to relieve poverty, it actually produces it ; " or, again, 
that, " whatever be the increase of productive power, rent 
steadily tends to swallow up the gain and more than the gain;" 
or, again, that " the ownership of the land on which and from 
which a man must live, is virtually the ownership of the 
man himself, and in acknowledging the right of some individ- 
uals to the exclusive use and enjoyment of the earth, we con- 
demn other individuals to slavery, as fully and as completely 
as though we had formally made them chattels." 

To a man who believed but a small fraction of this, the con- 
clusion which Mr. George announces at the close of the follow- 
ing paragraph would appear irresistible : — 

" As long as this institution exists, no increase in productive 
power can permanently benefit the masses, but, on the con- 
trary, must tend to still further depress their condition. . . . 
Poverty deepens as wealth increases, and wages are forced 
down while productive power grows, because land, which is 
the source of all wealth and the field of all labor, is monopolized. 
To extirpate poverty, to make wages what justice commands 
they should be, the full earnings of the laborer, we must there- 
fore substitute for the individual ownership of land a common 
ownership." 

511. Examination of Mr. George's Propositions.— I 
believe I have presented, in the foregoing extracts, every essen- 
tial feature of Mr. Geoi"ge's economic system, without sup- 
pression or perversion. Let us now take up, in inverse order, 



* The paragraphs following are condensed from my work, Land and 
Its Rent. 



424 POLITICAL ECONOMY. 

Mr. George's three capital propositions. And, first, how much 
is there in the view that commercial disturbance and industrial 
depression are chiefly due to the speculative holding of 
land? 

That land, in its own degree, shares with other species of 
property in the speculative impulses of exchange, is a matter 
of course. Every body knows it ; no one ever thought of 
denying it. Mi*. George makes no point against private prop- 
erty in land, however, unless he can show that it is, of all 
species of property, peculiarly the subject of speculative 
impulses. Now, this is so far from being either self-evident or 
established by adequate induction, that the contrary is the 
general ©pinion of economic writers. Of all species of prop- 
erty, land, especially agricultural land, starts latest and stops 
earliest in any upward movement of prices, as induced, for 
instance, by a paper-money inflation, which perhaps affords, 
the best opportunity for the study of purely speculative 
impulses. 

512. We now come to Mr. George's second count. The 
allegation that the enhancement of the value of land, above 
what should be regarded as the capitalized value of its present 
productive or income-yielding power, withdraws large bodies 
of land from cultivation, thus driving labor and capital to 
poorer and more distant soils, in order to secure the needed 
subsistence of the community, can only be characterized, so 
far as all the agricultural* uses of land are concerned, as a 
baseless assumption, for which not a particle of proper statis- 
tical proof can be adduced, and which is directly contrary to 
the reason of the case. 

Because, forsooth, a man is holding a tract of land in the 
hope of a rise in its value, years hence, does that constitute 
any reason why he should refuse to rent it, this year or next, 
and get from it what he can, were it no more than enough to 
pay his taxes and a part of the interest on the money borrowed 
to " carry " the property ? How unreasonable to assume that 

* It will be observed that in the extracts quoted it is cultivation whielt 
is spoken of. 



MR. GEORGES VIEW ON RENT. 4^5 

men owning good productive land will refuse to allow it to 
be cultivated now, simply because they can not get for it 
a rent which corresponds to what they look forward ulti- 
mately to realize as its capital price ! 

Undoubtedly the speculative treatment of building lots does 
cause a certain amount of city real estate to be held out of 
use. Nobody needed Mr. George to tell him this ; but that 
the amount of land so reserved is such as seriously to retard 
the development of population, trade, or manufactures, except 
in a craze like that which seized the people of San Francisco 
in 1868,* seems highly improbable. 

513. Progress and Poverty ?— Let us now proceed to deal 
with Mr. George's main proposition, the proposition to which 
the others are subsidiary. If this be established, it really does 
not matter much whether the others are true or not, since the 
condition of humanity under the grinding pressure of this main 
force will be about as bad as it could be ; while, if this be dis- 
proved, Mr. George's whole system must break down ridiculous- 
ly, leaving it to matter little whether the minor evils attributed 
to the private ownership of land be found to have any real 
existence or not. This it is which constitutes the original 
feature of Mr. George's book, the proposition, namely, that, 
"irrespective of the increase in population, the effect of 
improvements in methods of production and exchange is to 
increase rent ; " this effect being carried so far that " all the 
advantages gained by the march of progress go to the owners 
of land, and wages do not increase," the laboring man having 
" no more interest in the general advance of productive power 
than the Cuban slave has in advance in the price of sugar," 
capital also, in its turn, suffering, and to an equal extent, 
since, as Mr. George states, the effect of labor-saving 
machinery or improvements is to increase rent without 
increasing either wages or interest. 

*This episode, consequent on the fast approaching completion 
of the first trans-continental railway, appears to have profoundly 
affected Mr. George's mind, and have produced in him the belief that 
what there and then took place, under extraordinary circumstances, is a 
common incident of land ownership. 



4*6 POLITICAL ECONOMY. 

Now this is not only false, but ridiculously false, blunder 
being piled on blunder, to reach a conclusion so monstrous. 

514. In the first place, the proposition is contradicted by 
plain facts of common observation and by unimpeachable 
testimony of industrial statistics. The laborer has gained in 
wages through the labor-saving inventions and improvements 
of modern times. Speaking of England, Sir James Caird 
says : " The laborer's earning power in procuring the staff of 
life cost him five days' work to pay for a bushel of wheat 
in 1770, four days' in 1840, and two and a half days' in 1870." 
So much for bread. "Thirty years ago," says Sir James, 
" probably not one-third of the people of this country con- 
sumed animal food more than once a week. Now, nearly all 
of them eat it in meat or cheese or butter, once a day." The 
same high authority adds : " The laborer is better lodged 
than he ever was before." We need no one to tell us that 
the laborer's power to purchase manufactured articles has 
increased, since 1770, much more rapidly than his power to 
purchase agricultural produce, whether animal or vegetable. 

To the assertion of Mr. George that even the capitalist gains 
nothing by inventions and improvements in the agencies of 
trade or manufactures, because the landlord usurps and absorbs 
all possible increase of productive power, what better answer 
can we give than that of Professor Emile de Laveleye, himself 
a qualified advocate of the state ownership of land ? 

" Who occupy the pretty houses and villas which are 
springing up in every direction in all prosperous towns ? Cer- 
tainly, more than two-thirds of these occupants are fresh 
capitalists. The value of capital engaged in industrial enter- 
prise exceeds that of land itself, and its power of accumulation 
is far greater than that of ground rents. . . . We see, then, 
that the increase of profits and of interest takes a much larger 
proportion of the total value of labor, and is a more general 
and powerful cause of inequality, than the increase of rent." * 

516. So much for industrial statistics and facts of common 
observation. Let us now turn to the reason of the case. And, 

* " Contemporary Review," November, 1882. 



MR. GEORGE'S VIEW OF RENT. 427 

first, let us recite Mr. George's own argument. " The effect," 
he says, " of labor-saving improvements will be to increase 
the production of wealth. Now, for the production of wealth, 
two things are required — labor and land. Therefore the effect 
of labor-saving improvements will be to extend the demand 
for land." 

A pretty piece of reasoning this ! Two things are needed 
for the production of wealth, land and labor ; therefore an 
increase of production will " extend " the demand for land, for- 
sooth ! But why not also for labor, since both are concerned 
in production ? 

But Mr. George is further in error, even, than would so far 
appear. He has got the thing exactly wrong. It is not only 
true that an increased production of wealth may involve an 
enhanced demand for labor as well as for land ; but it is also 
incontestably true that the increased production of wealth 
rarely if ever causes an increased demand for land without a 
corresponding demand for labor, while, on the contrary, an 
increased production of wealth may cause an enormous increase 
in the demand for labor without enhancing the demand for 
the products of the soil in any degree whatsoever. 

Here is a pound of raw cotton, the production of which 
makes a certain demand, or drain, upon the land. To that 
cotton may be applied the labor of one operative for half an 
hour, worth, say, five cents. Successive demands for the pro- 
duction of wealth may lead to the application of, first, a full 
hour's labor, then of two hours', then of three, four, or five ; 
finer and finer fabrics being successively produced, until at 
last the pound of cotton has been wrought into the most 
exquisite articles. Mr. George says that the whole effect of 
any increase in the production of wealth is to enhance the 
demand for land. Here is a large increase of production, two- 
fold, threefold, tenfold, with no additional demand, or drain, 
upon the soil. 

516. But I go further, and assert, without fear of contra- 
diction, that not only is no increase in the demand for land 
necessarily involved in an increased production of wealth, but 
that the enhancement of the demand for land, in the progress 



428 POLITICAL ECONOMY. 

of society, habitually falls short of the enhancement of the 
demand for labor, the increase of production taking two great 
forms, — one which involves no increase whatever in the 
materials derived from the soil ; the other in which the 
increased demand for land falls short, generally far short, 
often almost infinitely short, of the increased demand for 
labor. 

Let us look around. I have cited one instance, that of the 
use made in the mill of a pound of cotton, manufactured 
successively into fabrics worth, perhaps, twenty cents a pound, 
then thirty, then fifty, then one dollar. This is not an 
extreme case. 

Here is the rude furniture of a laborer's cottage, worth 
perhaps $30. The same amount of wood may be made into 
furniture worth $200 for the home of the clerk, or into 
furniture worth $2,000 for the home of the banker. The steel 
that would be needed to make a cheap scythe worth eighty cents 
may be rendered into watch-springs, or surgical or philo- 
sophical instruments worth $100 or $200. A gentleman of 
means goes to Delmonico's, and pays two, three or five dollars 
for a dinner which makes no heavier drain upon the productive 
essences of the soil than a dinner of eorned beef and cabbage 
for which a laborer pays twenty-five cents. A part of the 
difference between the prices of the two dinners, to be sure, 
represents the cost of an expensive business " stand " on Fifth 
Avenue ; but by far the greater part represents service of one 
kind or another, at one stage or another, in making the dishes 
exquisite in appearance and flavor, in serving them neatly and 
elegantly with all the appliances of taste and fashion. Our 
gentleman, before dining, had perhaps been measured for a 
pair of boots for which he was to pay $12 or $15, yet con- 
taining no more leather, and so making no more draught upon 
the productive essences of the soil, in the way of nourishing 
the animal from which the leather was cut, than the laborer's 
$3 pair of " stogies " ; he had also ordered a suit of clothes for 
$60 or $75, at his tailor's, no thicker, no warmer, containing 
no more fiber, than the laborer's $15 tweeds. In all these 
cases (and they fairly represent the facts of personal con 



MR. GEORGE'S VIEW OF RENT. 4 2 9 

sumption in modern society) the main cause for the excess of 
value in products of higher price is not the use of a larger 
quantity of material, involving a greater demand or drain upon 
the productive essences of the soil, but the application of 
more labor to the same quantity of material. 

517. How Far Mr. George is in Error. — In contradiction, 
then, of Mr. George's proposition that the entire effect of an 
increase of production is expended in raising rents, neither 
wages nor the interest of capital deriving any gain whatsoever 
therefrom, rent indeed absorbing the entire gain," and more than 
the gain," we have seen, — 

1. That an increase of production may enhance the demand 
for labor equally with the demand for land. 

2. That, in fact, in those forms of production which 
especially characterize modern society, the rate of enhancement 
of the demand for labor tends to far exceed the rate of 
enhancement of the demand for land. 

3. That an increased demand for the production of wealth 
may, and in a vast body of instances does, enhance the 
demand for labor without enhancing the demand for land in 
any, the slightest, degree, the whole effect being expended in 
the elaboration of the same amount of material. 

4. We have now only to show, in the fourth place, that, 
instead of all improvements and inventions increasing the 
demand for land, as Mr. George declares, the most numerous 
and most important classes of improvements and inventions 
actually operate powerfully, directly, and exclusively, in reduc- 
ing the demand for land, — we have, I say, only to show this, to 
convict this writer of the grossest incompetence for economic 
reasoning. This it will be easy to do. 

518. Influence, upon Rents, of Improvements in Trans- 
portation.— With few exceptions, all improvements and 
inventions fall naturally under one or another of three 
great classes, — first, those which affect manufacturing indus- 
try ; second, those which affect transportation ; third, those 
which affect the cultivation of the soil. 

Of these three classes it has always been admitted by econ- 
omists that the first tends to enhance the demand for land, 



43° POLITICAL ECONOMY. 

and thus to raise rents, although, as we have just now seen, 
not necessarily, or indeed usually, without also enhancing the 
demand for labor and capital, and thus raising wages and 
interest. The two remaining classes of improvements and 
inventions tend directly, and indeed operate exclusively,* to 
reduce the demand for land, leaving, thus, the whole advan- 
tage of such improvements and inventions to be acquired by 
either labor or capital, or, in one proportion or another, by 
both labor and capital. 

And, first, of improvements in transportation. I need not 
waste time in calling to mind the mighty strides which inven- 
tion has made, during the past fifty years, in this direction, 
substituting for the sailing vessel of 400 tons, which carried 
its petty cargo of wheat in forty or sixty days from New 
York to Liverpool, the steamship of 5,000 tons, which makes 
the passage in nine days or twelve ; substituting for the tedi- 
ous wagon carriage which in forty or fifty miles, perhaps in 
twenty or thirty only, ate up the whole value of the freight, 
carriage by steam cars, drawn on steel rails, which, allowing 
for transport from Dakota to New York, leaves enough of the 
value of the freight to pay for the ocean passage and for the 
support of the producer upon those distant plains. Add the 
telegraph and the fast mail, for transmitting orders and trans- 
acting sales, and one will hardly question the assertion that 
the greatest of all the classes of improvements and inventions 
effected within the last half -century, has been that which 
relates to transportation. 

Is it the effect of improvements of this class to enhance 
rents? Absolutely and exclusively the reverse. Whatever 
quickens and cheapens transport, acts directly in the reduction 
of rents, and can not act in any other way, since it throws out 
of cultivation the poorer lands previously in use for the supply 
of the market, enabling the better soils at a distance to take 
their place, thus raising the lower limit, or, as it is called, the 
" margin " of cultivation, and thus reducing rents. 

* " Irrespective of the increase of population," to use Mr. George's own 
roluntary qualification. 



MR. GEORGE'S VIEW OF RENT. 43* 

519. Influence, upon Eents, of Improvements in Agricul- 
ture. — But, secondly, take the case of agricultural improve- 
ments and inventions. Here the effect on rents is not so sim- 
ple. Yet it is perfectly demonstrable that, of the two groups * 
into which such inventions or improvements are divided, all 
of one kind diminish rent in a certain degree, while all of the 
other kind diminish it in a much higher degree. 

The two kinds of agricultural improvements and inventions 
referred to are : 

First, those which do not actually increase the amount of 
produce, but diminish the labor and expense by which that 
amount is obtained, such as the improved construction of 
tools, or the introduction of new instruments which spare 
manual labor. 

Second, those which enable the land to yield a greater 
absolute produce, such as the disuse of fallows by means of 
the rotation of crops, the introduction of new vegetable species, 
the introduction of new and more powerful fertilizing agents 
or a better application of familiar manures, and mechanical 
inventions, like sub-soil plowing or tile-draining. 

Now, improvements or inventions of the first class, as, by 
the supposition, they do not increase the produce of the land, 
so they do not, supposing them to be equally applicable to all 
grades of soil, diminish the share of that produce going to the 
landlords as rent. But while the actual number of pounds, 
bushels, etc., of agricultural products going to the owners of 
the soil remains the same, in the face of such improvements 
and inventions, those products are cheapened through the sav- 
ing of labor in their production. Thus, while rents remain the 
same, in kind, their money value, or power to purchase the 
products of other branches of industry or the services of other 
classes of producers, is diminished in just so far as such 
improvements are effectual. 

520. Next, it is clear that those agricultural improvements 
and inventions which enable a given area to yield a greater 
quantity of produce, act even more directly in diminution of 

* As justly characterized by Mr. J. S. Mill. 



43 2 POLITICAL ECONOMY. 

rent. Take, for illustration, the disuse of fallows by rotation 
of crops. Formerly it was thought necessary to let even the 
best land lie out of cultivation one year in three or four. On 
the contrary, it is now perfectly established that, if crops be 
duly varied, land may be continuously cultivated without 
exhaustion. It is evident that this discovery is equivalent to 
increasing the capacity of any tract by one-half or one-third : 
so that, for a given amount of agricultural produce requrred 
for the sustentation of the community and for the raw mate- 
rials of manufacture, such an improvement would allow vast 
bodies of the poorer grades of soil to be thrown out of cultiva- 
tion, thus diminishing (paragraph 257) the aggregate amount 
to be received, as rents, by landlords, in that community. A 
similar effect, in a greater or less degree, would be produced by 
the introduction of new and more powerful fertilizers, or by 
sub-soil plowing and under-drainage. 

521. Summing up. — We thus see that all real agricultural 
inventions and improvements tend, as all improvements and 
inventions in transportation tend, directly and exclusively, to 
diminish rents. So that of the three grand classes into which 
industrial improvements and inventions are divided, two act in 
a direction exactly opposite to that in which Mr. George's 
theory would require them to act. Of the third grand class of 
improvements and inventions, viz., those relating to manufac- 
tures, we have admitted that some do, by calling for larger 
amounts of raw material, enhance the demand for land ; but 
we have shown, that in these very cases, the increase in the 
demand for labor is almost always equal to the increase in the 
demand for land, is often greater, is sometimes vastly greater. 
We have, also, shown that there are other, still more numerous 
and more important, impi-ovements and inventions in manufac- 
tures which do not enhance the land in any degree, while they 
call for greater and still greater applications of labor to the 
same amounts of material. 

Can any thing more be required to show how groundless and 
preposterous is the view of the hitherto unsuspected import- 
ance of rent as a factor in the distribution of wealth, which 
Mr. George has presented as a marvelous discovery in econ- 



THE BANKING FUNCTIONS. 433 

©mics, and upon which he has built his pretentious super- 
structure : the necessary relation of Progress to Ever Increas- 
ing Poverty ? That such an argument should for a moment 
have imposed upon anybody, is enough to give one a new con- 
ception of the intellectual capabilities of mankind. 

XL 

THE BANKING FUNCTIONS. 

522. " The trade or profession of banking," says Lord 
Liverpool, " has been exercised in all countries and all ages. 
It existed in the republic of Greece and in ancient Rome. 
There were, in all these States, men who received money as a 
deposit, repaid it upon the drafts of those who had intrusted 
them with it, and derived their profits from having this money 
in their custody." 

1st. Financiering. — In modern times, the first banks appear 
in Italy. Mr. Bagehot states that the earliest of these " were 
finance companies. The Bank of St. George, at Genoa, and 
other banks founded in imitation of it, were at first only com- 
panies to make loans to, and to float loans for, the govern- 
ments of the cities in which they were founded." 

" Financiering," then, may be regarded as the first banking 
function developed, in modern times. In the reign of William 
and Mary certain capitalists made a loan of £1,200,000 to the 
English government, receiving, in consideration therefor, a 
charter constituting them the Governor and Company of the 
Bank of England. Robert Morris's Bank of North America 
had a very similar origin. Under the present National Bank- 
ing system of the United States, the bank begins by lending 
all, or nearly all, its capital to the government. The great 
war loans of the United States, 1861-5, were, in the main, 
" floated " by the banks. 

523. 2d. Book Credits of the Bank of Amsterdam.— The 
next banking function historically developed was that of 
giving the people good money in place of a medley of worn 
and clipped coins, of a great diversity of coinages, belonging 



434 POLITICAL ECONOMY. 

to many nations. It was to serve this office that the banks of 
Northern Europe were created. 

"Before 1609," says Adam Smith, "the great quantity of 
clipped and worn foreign coin which the extensive trade of 
Amsterdam brought from all parts of Europe, reduced the- 
value of its currency about 9 Der cent, below that of good 
money, fresh from tne mint, cmch money no sooner appeared 
than it was melted down or carried away, as it always is in 
such circumstances.* The merchants, with plenty of currency^, 
could not always find a sufficient quantity of good money to 
pay their bills of exchange ; and the value of those bills, in 
spite of several regulations which were made to prevent it y 
became in a great measure uncertain. 

" In order to remedy these inconveniences, a bank was 
established, in 1609, under the guarantee of the city. This 
bank received both foreign coin and the light and worn coin 
of the country, at its real intrinsic value in the good standard 
money of the country, deducting only so much as was neces- 
sary for defraying the expense of coinage and the other neces- 
sary expenses of management. For the value which remained 
after this small deduction was made, it gave a credit on it© 
books. This credit was called bank-money, which, as it rep- 
resented money exactly according to the standard of the mint,, 
was always of the same real value, and intrinsically worth 
more than current money. It was at the same time enacted; 
" that all bills drawn upon or negotiated at Amsterdam, of 
the value of 60 guilders or upwards, should be paid in bank 
money, which at once took away all uncertainty in the value 
of those bills." 

It will be observed that Adam Smith calls these credits.' 
inscribed upon the books of the Bank of Amsterdam, " bank- 
money ; " but this money, if it is to be called so, will be seen 
to differ widely from the bank money of to-day, already 
described : 1st. It did not circulate from hand to hand, a* 
the ordinary medium of effecting exchanges ; 2d. It was- 
never in excess of the amount of metallic money actually int 
tiie vaults on deposit. 

* See statement of Gresham's Law, par. 181. 



THE BANKING FUNCTIONS. 435 

524. 3d. Cancellation of Indebtedness.— The next banking 
function, which we are called upon to notice, is the Cancel- 
lation of Indebtedness. 

An enormous volume of indebtedness at all times exists in 
any highly progressive country, which has to be paid and 
renewed from day to day. The labor and loss of time 
involved in collecting debts and paying moneys, with the 
probable delay and disappointment involved therein, would 
be almost intolerable unless some special agency were estab- 
lished for doing this work upon a large scale and with all the 
advantages which we have found to result from the appli- 
cation of the division of labor. This function the bank 
performs. 

If, in any great city, many banks are required to carry on 
this function, these banks, in turn, establish a common agency 
for settling their mutual obligations, called a Clearing House.* 

The transactions of such an institution in New York or 
London may amount to thirty or forty thousand millions of 
dollars a year. This vast body of indebtedness is adjusted 
through the labor of a hundredth part as many clerks and 
messengers, and the use of a hundredth part as much actual 
money as would have been required, had each person who had 
money owing to him been obliged to attend to the collection 
himself, or through his own clerks or messengers. 

525. 4th. Exchange — The next banking function is to 
remit money and conduct exchange. 

What is termed " Exchange," is merely the principle of the 
cancellation of indebtedness between individuals of the same 
city, carried out to trading communities and nations. We 
shall speak, under a subsequent title, of the principles regulating 
Foreign Exchanges. 

This function, again, the bank to a great extent performs, 
and in so doing renders the trading community an immense 
service. If every merchant who had to pay money in another 
city or country were obliged to find out, for himself, some 

* The subject of the Clearing House and, indeed, all the agencies and 
instrumentalities of trade will be found treated most lucidly and justly 
in Prof. Jevons' work "Money and the Mechanism of Exchange." 



43 6 POLITICAL ECONOMY. 

person who had the right to receive money at that place, at 
that time, and perhaps in the same sum, an inconceivable 
amount of inconvenience and delay, of vexation and disap- 
pointment, often resulting in commercial discredit, would be 
experienced. 

If we may accept Mr. Henry Thornton's account * of the 
rise of the country banks of England, it was through the 
gradual growth of exchange-operations between country shop- 
keepers and those of the cities, that these institutions came, 
almost unnoticed, into existence. 

526.— 5th.— Safe Deposit;— The fifth banking function is to 
serve as a place of safe deposit. Mr. Francis, in his History of 
the Bank of England, attributes the rise of the city banks 
primarily to the need of this service. In the unguarded and 
unlighted London which Macaulay so graphically describes in 
his memorable Third Chapter, robberies and burglaries were 
of frequent occurrence. No man's home was safe, if known to 
contain any considerable amount of treasure, unless barricaded 
and defended by armed servants. The goldsmiths, having in 
the way of their trade to keep large quantities of gold and 
silver, had strong houses strongly guarded. To them, men of 
smaller means, private gentlemen, or shopkeepers, intrusted 
what they dared not keep at home, paying, at first, for the 
privilege. 

In the course of time, the goldsmiths found that this custody 
of funds afforded a legitimate opportunity for realizing a profit, 
through loaning some part of these deposits. Then the deposi- 
tors were no longer required to pay for the safe keeping. In 
time, the bankers came, perhaps, to pay interest on the 
deposits, themselves, which they loaned out to others, at higher 
rates, while the depositors received certificates of the value of 
what they had left with the goldsmiths. The certificates soon 
began to circulate from hand to hand. " These," says Mr. 
Francis, "may be considered the first kind of bank notes 
issued in England." In this way the goldsmiths' street in 
London, Lombard Street, came to be the bankers' street, the 
greatest banking street of the world. 

* In his famous work on Paper Credit, published in 1802. 



DEPOSIT AND DISCOUNT. 437 

The ordinary bank is still, to a great extent, a place of safe 
deposit for money, family jewels, deeds, and bonds, although 
special institutions for safe deposit are now found in many 
large cities. 

527.— 6th. Deposit and Discount.— The sixth and the chief 
of the legitimate functions of the modern bank is to serve as 
an intermediary in the loan of capital, in aid of commerce and 
manufactures and other private enterprises, not merely to loan 
its own capital, as in the case of the Bank of Genoa and others 
that have been spoken of, or to conduct loans for government, 
or for great corporations. 

The technical terms, deposit and discoiint, serve to charac- 
terize this function. It is in this way that banks make their 
largest contribution to the advancement of commerce and 
industry. This office of banking is, however, as much over- 
rated by some as it is underrated by others. Men who are not 
versed in economic principles, when they see the wonderful 
effects wrought by gathering into one great reservoir the 
wealth of ten thousand individuals, much of which would other- 
wise be hoarded or unwisely applied, and conducting it thence, 
as occasions require, in various directions, through channels 
judiciously devised to secure the highest and most effective 
irrigation of the field of industry, are apt to imagine that the 
bank in some way creates capital. This is a wholly mistaken 
notion. The bank adds to the wealth of the community only 
by economizing and directing capital to the best ends. 

So important is this function that most European writers, 
when they speak of banking, have only in mind deposit and 
discount, all other functions being held to be minor and sub- 
ordinate. 

528.— 7th. Issue of Paper Money — To an American, how- 
ever, the word, banking, is more likely to bring up the notion 
of paper money. The issue of such money is the seventh and 
the last of the banking functions which we have occasion to 
consider. 

That the making of money is not necessarily connected 
with deposit and discount, is abundantly established by the 
consent of all writers of authority in this field, as well as by 



43 8 POLITICAL ECONOMY. 

the example of many of the greatest deposit banks of the 
world. " Issuing," says Mr. Nicholson, " is creating money ; 
banking is managing money after it has been issued." 

" A bank of issue," says Lord Overstone, " is intrusted with 
the creation of the circulating medium ; a bank of deposit and 
discount is concerned only with the use, distribution or appli- 
cation of that circulating medium. The principles upon which 
these two branches of business ought to be conducted are per- 
fectly distinct, and never can be reduced to one and the same 
rule." 

The great London joint-stock banks, a single one of which 
holds deposits rising into tens of millions, and whose ordinary 
dividends are three times as great as those of the Bank of 
England, never issue a note. 

In this country, however, the word bank, through much of 
our history, has to most people signified little more than a 
place where paper money was manufactured. 

529. The Banking Agencies.— Such are the banking func- 
tions. The agencies by which the functions are performed 
may be grouped under four heads : (1), state banks ; (2), 
joint-stock banks ; (3), private banks ; (4), bill-brokers and 
dealers in exchange. These agents enter in very different 
proportions to effect the banking work to be done in different 
countries. In this country, so large a part of the banking 
work was, from the beginning of the country till the outbreak 
of the war of secession, done by joint-stock banks, that it may 
be broadly said that this was the sole banking agency known 
to our people, although, in a few cities, private banking 
houses of high reputation were early started and well main- 
tained, and the business of bill-broking was not unrecognized. 
Under another title, we shall give a brief sketch of the pres- 
ent " National Banking System " of the United States. 



XII. 



THE PRESENT BANKING SYSTEM OF THE UNITED STATES. 

530.— The National Banking System of the U. S.*— 

No bank, in the modern sense of that term, was established in 
America during the colonial period. The word, bank, was indeed 
sometimes used, with reference, however, to a batch of paper 
money issued from a colonial treasury. During the revolu- 
tion the eminent financier, Robert Morris, established a bank 
in aid of the continental finances. In 1790 there were three 
foanks in the United States ; the Bank of North America, in 
Philadelphia, established, as related, by Robert Morris, but 
then under a charter from the state of Pennsylvania ; the 
Bank of New York, in the city of that name ; and the Bank of 
Massachusetts, in Boston. In 1791 was created the first Bank 
of the United States, with a capital of ten millions of dollars, 
having a charter for twenty years, with power to issue notes 
payable on demand in specie. So completely without regula- 
tion and without inspection was the so-called paper money of 
the United States in that period, that it is impossible to recover 
the facts of banking capital, circulation, deposits or specie. 
Scarcely a statistical fragment survives. There is reason to 
suppose that the officers of many banks did not themselves 
know the liabilities of their own institutions. The paper 
money issued by such an institution, was, in every economic 
sense, inconvertible. The pretense of conversion could only 
be maintained by a stringent public opinion, hostile to the 
presentation of bank notes for redemption, by bank retalia- 
tions, and even, in frontier communities, by " lynch law." 

531. On the refusal of Congress tore-charter the bank of 
the United States, a large number of the state banks sprang into 
existence, almost all of the usual American " joint-stock " 
type, on the principle of limited liability. In not a single 
state were the banks subject to regulation or even supervision, 

* The first part of this article is condensed from the twelfth chapter of 
-my work on Money, Trade and Industry. 



440 POLITICAL ECONOMY. 

to make sure that they did their duty or that they did not 
commit injury. The language of Mr. J. R. McCulloch, re- 
garding the American banking system of that day, is hardly 
extravagant. " Had a committee of clever men been selected 
to devise means by which the public might be tempted to 
engage in all manner of absurd projects, and be most easily 
duped and swindled, we do not know that they could have 
hit upon any thing half so likely to effect their object as the 
existing American banking system. It has no redeeming 
quality about it, but is, from beginning to end, a compound 
of quackery and imposture." 

532. The outbreak of war with England caused the sus- 
pension of specie payments by nearly all banks except those 
of New England ; but this was followed by an enormous in- 
crease of issues, so that the outstanding notes, which had been 
estimated at twenty millions in 1811, rose, according to Sec- 
retary Crawford, to somewhere between sixty-two and seventy 
millions in 1813, and to somewhere between ninety-nine and a 
hundred and ten millions in 1815. The fact that it was im- 
possible for the secretary of the treasury to tell, within eleven 
millions, the amount of the notes outstanding, is fairly char- 
acteristic of the monetary system at this time. The circulat- 
ing paper was of every degree of value down to utter worth- 
lessness. Many banks were ably managed by honest men, 
with reasonable regard to the public interest. Many were 
organized and conducted by sharpers and swindlers, as a 
means of wholesale robbery.* 

At the close of the war, in 1815, the depreciation of bank 
paper reached, in some cases, fifteen, twenty and even twenty- 
five per cent. The excess of circulating paper had also been 
promoted by the extensive issue of United States treasury 

* Prof. Sumner, in his History of American Currency, states that the 
Farmers' Exchange bank, of Gloucester, Mass. , was organized with a 
nominal capital of one million dollars. Only $19,141.46 was ever paid 
in ; and of this the directors subsequently withdrew their own subscrip- 
tions, leaving $3,081.11. One man bought out eleven directors for $1,300 
each and then loaned himself $760,265. When the bank failed it had 
$86.46 in specie. The bank notes outstanding were estimated at $580,000- 



EARLY AMERICAN MONEY. 441 

notes. These were not of forced circulation ; they failed to 
be paid at maturity, and added greatly to commercial distrust 
and distress. Throughout 1816 the banks continued to issue 
their discredited notes, while floods of unchartered scrip were 
poured out, in bills of all denominations from six cents 
upward. 

533. The evils of the financial situation led to the estab- 
lishment, in 1816, of the second Bank of the United States, 
with a capital of thirty -five millions, of which the United States 
government owned one-fifth, and with a charter having 
twenty years to run. Before 1836, however, the bank had 
been broken down by the relentless attacks of President Jack- 
son, and it was finally driven to take refuge under a Pennsyl- 
vania charter. Our space will not serve to discuss how far the 
failure of the second United States Bank to perform its antici- 
pated office of regulating the paper circulation and of pre- 
venting excessive and improper issues by the state banks, was 
due to its original constitution ; how far to false management; 
how far to circumstances ; how far to persecution by the 
administration. Suffice it to say that the paper money of the 
country, during this period, was a weltering chaos. The wildly 
extravagant issues of really inconvertible paper money, sup- 
plied the motive and the means for every species of extrava- 
gant, wanton and irresponsible speculation. Words could 
scarcely exaggerate the extent to which the distortion of pro. 
duction and the misapplication of capital were carried.* The 
whole head was sick and the whole heart faint. 



* " That the evils of this period were due chiefly to vices of paper money 
banking seems too clear to be questioned. The opening up of the west- 
ern country would inevitably have led to much wild adventure, com- 
mercially and industrially ; but it was the ' elasticity ' of the circulation, 
the facility of local issue, without the reality, or scarcely the pretense, of 
redemption, which made the banks, even the best of them, reckless as to 
the character of the enterprises to which they gave assistance ; while the 
money thus put into circulation, without ' reflux,' enhanced prices, and 
still further stimulated both speculative investments and speculative 
trading. When the courage of the better class of banks gave way, hun- 
dreds of ' wild cat ' or ' coon-box banks,' so called, without capital, 



442 POLITICAL ECONOMY. 

The retribution came in the panic of 1837, in the second 
and heavier shock of 1839, and in the long and dreary pros- 
tration of industry which followed. 

534. The experiences of this period led, in several states, 
to legislation designed to place the issue of bank notes on a 
sounder basis. In 1838 the free banking system of New 
York was established, under which all circulating notes were 
to be secured by deposit, with the state comptroller, of United 
States or New York stocks or bonds, and of mortgages on 
improved or productive real estate. A little later a law was 
passed requiring each bank to redeem its notes at some agency 
in New York city, Albany or Troy. Subsequent acts increased 
the proportion of securities to notes issued, and furnished fur- 
ther guaranties to holders. 

This is the scheme of secured circulation, known as the New 
York system, which came to be imitated, more or less fully ; 
and on which, to a considerable extent, the banking laws of 
the United States are framed. 

The plan of basing a circulation upon securities is not to be 
altogether approved. It does not give convertibility, in the 
sense of preventing excessive issues, even in the view of the 
advocates of the " banking principle." * It does not so much 
as secure the perfect acceptability of the notes, as a medium 
of exchange, since the receiver desires to be assured that the 
notes will, at any moment, be worth what he has taken them 
for, whereas the New York system only gives him a pledge 
that, should the bank fail to redeem its notes, he will, at some 
future date, after the bank shall have been wound up and the 
securities disposed of by the comptroller, receive the face 
value of all the notes which he may then hold. 

without a constituency, with no past and no expectations of a future, 
whose managers risked nothing and had nothing to lose, came forward 
with loans of notes to speculators who planned to build cities in the 
wilderness, or contractors who proposed to construct roads and bridges 
without materials, tools, or money to pay wages. Again, as in early New 
England, abank meant abatch of paper money." — Walker: Money, Trade 
and Industry. 
* See paragraphs 224-6. 



THE NEW YORK SYSTEM. 443 

535. But while this system can not be accepted as 
based upon perfectly sound principles of money, or even of 
banking policy, it proved at the time so great a check on 
reckless paper money banking, and it has had so great an 
effect in educating the public mind to more correct views of 
the banking function and of the responsibilities attaching to 
note issues, that it deserves to be treated with much consid- 
eration by the historian of American money. The painful 
experiences of 1837-40, and the active discussion of the prin- 
ciples of money and banking which they called forth ; the 
growth of a public sentiment condemning an excess of paper 
issues, and the formulation of precepts, more or less carefully 
observed by bank managers ; a vast improvement in the com- 
mercial morality of the country, due partly to education, and 
even more to the development of manufactures which, to a 
vastly greater degree than agriculture, rest on good faith and 
commercial honesty ; the shortening of the terms of credit ;* 
these causes, together with the legislation which has been 
described and the development of the Suffolk bank system f 
in New England, served to place the paper money issues of 
the United States on an improved basis between 1840 and 
1860. The rapid improvement of trade and industry after 
the panic of 185 7, already alluded to (par. 243), affords a 
striking proof of the comparative soundness of credit, trade 
and industry in the later period. 

536. Early in the war of secession, the treasury being in 
great distress, Secretary Chase initiated the movement which 
resulted in the establishment of the present banking system 
of the United States. This system was to be essentially 
modeled on that established in New York by the law of 
1838, all note issues being secured by an abundant deposit, at 



* Prior to 1837 commercial credits were often extended to twelve and 
even eighteen months. 

f This was a system, gradually developed, by which substantially all 
the banks of New England were brought to maintain a deposit with the 
Suffolk Bank of Boston, in consideration of which that bank bound 
itself to redeem their notes on presentation. 



444 POLITICAL ECONOMY. 

the Treasury Department in Washington, of United States 
stocks. Indeed, it was this feature which furnished the real 
motive to the scheme. The Treasury was to sell to the banks 
some hundreds of millions of bonds, as the basis for their note 
circulation, while all notes of state banks not coming under 
the new system were to be " taxed out of circulation." 

As a measure of fiscal resource, the national bank law was 
essentially a failure. Owing to the delay in securing the 
desired legislation * and in transmuting the existing state 
banks into national banks, it was not until the war was nearly 
over and until the credit of the United States had become so 
well established as to give the Treasury the ability to borrow 
freely, at home or abroad, that the new national banks began 
to call for bonds in large amounts, as a basis of circulation. 

537. But while that banking system failed to answer 
the expectations of Secretary Chase as a fiscal resource, it 
resulted in placing the paper money banking of the country 
on a more secure and convenient basis than it had ever 
before occupied. In all previous periods of our national 
history the bank money of some sections had been liable to 
a discount — often a considerable discount — if offered far 
away from the place of issue ; while, in addition to the 
actual losses sustained by holders, the annoyance resulting 
from the frequent refusal to receive banknotes by those who 
did not know about the individual bank whose name and 
devices they bore, was almost intolerable. Under the existing 
system, a national banknote from Texas or Minnesota, if 
not suspected to be counterfeit, passes as readily in Massa- 
chusetts or Pennsylvania as the notes of local banks. By 
the new law, the United States Comptroller of the Currency, 
whose office was then created, was authorized to permit the 
establishment, for a term not exceeding twenty years, of 
banking associations consisting of not less than five persons, 
with a minimum capital, except in small places, of one 
hundred thousand dollars. Such associations were required 

* The act establishing the national banking system bears date Feb- 
ruary, 1863. 



NATIONAL BANK ACT. 445 

to deposit, with the Treasury Department, United States 
honds to the extent of at least one-third their capital, for 
which there should be issued to them circulating notes in 
amount equal to ninety per cent, of the market value of 
their bonds, but not beyond ninety per cent, of the par value 
of such bonds. The issue of currency, under this act, was to 
be limited to three hundred millions, that amount to be appor- 
tioned among the States according to population and banking 
capital. 

In 1882, a new law was passed, providing for extending the 
charters of national banks. 

538. The operation of the law regarding the deposit of 
United States bonds as a basis of circulation, may be illus- 
trated as follows : A national bank expends $160,000 in the 
purchase of bonds, then selling at 80 per cent, of their par or 
face value. The bank would then hold bonds to the amount 
(at par) of $200,000. On the deposit of these, the treasury 
department would issue circulating notes thereon to the 
extent of ninety per cent., not of their par, but of their market 
value, viz. : one hundred and forty-four thousand dollars. 
These notes, bearing its own corporate title and its character- 
istic devices, the bank would issue in the discount of commer- 
cial paper. This might, in fact, constitute the greater part of 
what the bank had, at the outset, to loan — its own promises 
to pay. If we suppose the bank to keep out the whole body 
of notes received from the treasury on loans bearing interest 
at an average rate of five per cent., the annual income from 
this source will be $7,200. In addition thereto, the bank will 
receive from the treasury department, semi-annually or 
quarterly, drafts for the amount of the interest falling due 
on the bonds held for the redemption of the notes. If the 
rate of interest on the bonds were four per cent, (on the par 
value, of course), the amount so received would be $8,000 a 
year, making the aggregate income on both accounts, $15,200. 
This would be a return of 9}4 per cent, on the amount — 
$160,000 — expended in the purchase of the bonds. In ad- 
dition thereto, would be the expectation of profit arising from 
the fact that, at the maturity of the bonds, be that five, 



446 POLITICAL ECONOMY. 

fifteen, thirty or fifty years hence, the government is bound to 
pay the face value of the bonds, whereas the bank purchased 
them at eighty per cent. Now, the " present value " of twenty 
(100-80) dollars, at five per cent, interest, is considerable if 
payable in five years, is worth considering if payable in 
fifteen years, is inconsiderable if payable in thirty or fifty 
years : so that this element may amount to much, little or 
nothing, according to the term which the bonds have to run. 

If, in a second case, the bank invested the same sum — 
$160,000, in United States bonds, at par, it would receive 
bonds to the amount of $160,000, on which the treasury de- 
partment would issue $144,000 worth of circulating notes, as 
before, being ninety per cent., this time, alike of the market 
and of the par value of the bonds held for redemption. 
Making the same assumptions as before, regarding the aver- 
age rate of interest realized by the bank on its loans, and the 
rate of interest on the bonds themselves, we should have the 
income from the former source, 87,200, and from the latter 
source, $6,400 ; an aggregate of $13,600, being eight and a 
half per cent, on the amount invested, with no longer any 
expectation of profit from the difference between the amount 
of purchase money and the principal of the bonds to be paid 
at maturity. 

If, in a third case, we suppose that the bank expends the 
same amount, as before, in the purchase of United States 
bonds, bearing a premium of twenty -five per cent, (and the 
bonds of the United States have almost always been at a 
premium, greater or less, at times rising, on some classes of 
bonds, to the rate assumed), the face value of the bonds so 
purchased would be but $128,000, on which the treasury 
department would issue notes to the amount of $115,200, 
being ninety per cent, of the face value of the bonds, though 
but seventy-two per cent., this time, of their market value. 
On the same assumption as to interest, etc., as before, the 
bank would receive from the loan of its notes $5,760 ; from 
the government, as interest on the bonds, $5,120 ; an aggregate 
of $10,880, or only six and eight-tenths per cent, on the 
$160,000 invested. In this case, moreover, there must be 



BANKNOTE ISSUES. 447 

taken into account an ultimate loss of one-fifth of the pur- 
chase money. Although the bank has paid $125 for each 
$100 bond, the government will, at maturity, pay only the face 
value, namely, $100. The "present value" of the amount 
thus to be, sooner or later, lost, is to be determined by the 
same principles which would be applied to obtaining the 
" present value " of the amount to be ultimately gained, had 
the bank purchased bonds at a discount. As we said before, 
their " present value " would be much, little or practically 
nothing, according to the term which the bonds had to run. 

539. The profit to the banks, under the present system, 
largely depends, it will be seen, upon two elements : the rate 
of interest on the bonds themselves, and the premium or dis- 
count at which the bonds can be, at any given time, purchased. 
During the war, abank could purchase, for $100,000 in green- 
backs, an equal amount of six per cent, bonds, payable, prin- 
cipal and interest, in gold. Depositing these in the treasury, 
it would receive 190,000 in circulating notes, which it would 
loan at such rates of interest as the commercial demands of 
the time allowed, and would receive each year, as interest, 
$6,000 in gold, which it could sell at twenty-five, fifty or even 
a hundred per cent, advance in gi'eenbacks, according to the 
enormously high, though fluctuating, war premiums on gold 
then prevailing. The gradual decline and finally the disap- 
pearance of the premium on gold*; the reduction in the rate 
of interest on government bonds from six per cent, to five, 
to four and a half, and ultimately to three and a half 
and even three per cent., through successive refunding opera- 
tions ; and lastly the appearance of high premiums upon bonds 
bearing the reduced rates of interest, these three causes have 
concurred to diminish, point by point, the profit, to the bank, 
in buying United States bonds and depositing them with the 
treasury department, as the basis of note circulation, until, 
at the present time (1887), many banks are surrendering 
their circulation, finding it more to their interest to use the 
capital at their command in other ways. The number of 

* Specie payments were resumed on January 1, 1879. 



448 POLITICAL ECONOMY. 

national banks at the present time in existence, is about 
two thousand nine hundred. These are, of course, distrib- 
uted very irregularly over the surface of the country. 

540. The money of the United States now consists of gold 
coin (twenty, ten, five, two and a half or one dollar pieces), 
legal tender for debts in any amount ; (2) of silver dollars, 
legal tender in any amount ; (3) of subsidiary silver coins 
(fifty, twenty-five, twenty, ten or five cent, pieces), legal ten- 
der in small amounts as change ; (4) of copper or nickel coins 
(five, three, two or one cent pieces) ; (5) of "greenbacks," of 
various denominations, from one dollar to one thousand dol- 
lars ; (6) of " gold notes " and (7) of " silver notes," of various 
denominations, issued solely upon the deposit, at the several 
sub-treasuries,* of equivalent amounts of gold or silver ; (8) of 
national banknotes, issued as hereinbefore described. In 
this highly complex mass, the proportion of banknotes is con- 
tinually diminishing, owing to the reduction in the profits of 
banknote circulation already accounted for. This fact con- 
stitutes one of the gravest features of the financial situation, 
and threatens the country with the speedy loss of all the advan- 
tages thus far enjoyed under the national banking system. 

XIII. 

FOREIGN EXCHANGES. 

541. Meaning of Exchange. — Formerly, when debts were 
paid by the merchants of one country to those of another, 
it was almost always necessary actually to change the money 
of the debtor country into that of the creditor country. Thus, 
if a merchant in Paris had occasion to pay a debt to a mer- 

* After the destruction of the second United States Bank and the 
crisis of 1837-9, the United States government adopted the policy of 
keeping its funds in its own treasury at "Washington, or in the custody 
of "assistant treasurers," appointed in the great commercial cities. The 
offices of the assistant treasurers are popularly called "sub-treasuries." 
The origin and development of the sub-treasury system will afford an 
admirable economic exercise for advanced students. 



FOREIGN EXCHANGES. 449 

chant in Antwerp, it was necessary first to compute the quan- 
tity of "fine " (i. e. pure) silver contained in the amount of 
Antwerp money due under the contract ; then to find out how 
many French coins (their weight and fineness being known) 
would be required to make up that amount of pure silver. 
This being ascertained, the Paris merchant paid down the 
French money (plus the premium, or minus the discount, of 
which we shall speak later) and received the Paris banker's 
order upon some Antwerp banker to pay the Antwerp mer- 
chant the amount of Antwerp money due him. It was with ref- 
erence to this changing of one kind of money into another, that 
the term exchange was first applied to this class of transactions. 
It came in time, however, to be equally applied to transac- 
tions between cities under the same government, having the 
same kinds of money, where, hence, no actual changing of 
money pieces was required. 

At the present time, this changing of money pieces plays a 
very much less important part in exchange. Instead of 
many states having independent authority to coin money, 
there is now but one coining authority in all Italy. The 
money of Germany is now uniform in weight and fineness. 
France, Italy, Belgium, Switzerland, Greece and Austria have 
certain money coins which may be said to be in common, i. e., 
they contain the same amount of pure metal, though 
under different denominations and with different inscriptions. 
The vast extension of the British empire has made the " sov- 
ereign " current money over a large part of the globe. 

542. "What is Exchange ? — In essence, where a man buys 
exchange — he buys the right to have paid to him, or his agent, 
or his creditor, a certain amount of fine gold or silver, to be 
delivered in some other place mentioned in the contract. If I 
buy in New York " exchange on London," some one who has 
gold in London, or who has a right to demand gold there, sells 
me his claim to receive a definite amount of that metal, in Lon- 
don, at a definite time, or at my convenience if we so agree. 
I may then, either go to London and get the metal, as, for 
instance, if I am starting out on a European tour, or I may 
send an order, by post or telegraph, for some one else to get 



45° POLITICAL ECONOMY. 

it there, as, for instance, if I have bought cotton goods oi 
pictures in London, and have agreed to pay for them in 
this way. 

543. Par of Exchange. — Now, we may suppose that, in 
order to induce some person to sell me " exchange on London," 
I have to pay him, not in goods, but in a certain amount of 
gold in New York, where we both live. How much gold shall 
I pay him in New York to induce him to give me the right 
to receive a certain amount, say 1,000 ounces, of gold in Lon- 
don ? Shall I have to pay him 1,000 ounces, or more, or less ? 
That depends on whether exchange is at par (equality), or 
above par, or below par. 

Exchange between two places is at par, when, by paying a 
certain amount of money metal, or its equivalent, in one 
place, you can purchase the right to receive an equal 
amount of the same metal in the other. I say, the same metal, 
for there can be no par of exchange between countries hav- 
ing gold money and countries having silver money, unless, 
indeed, the bi-metallists (par. 563) shall make good the claim 
that their system will establish and maintain a certain definite 
ratio between the values of the two metals. 

Exchange is above par or below par, when the right to 
receive elsewhere a given amount of gold or silver, is to be 
purchased by paying, in the one case, a larger, and, in the 
other case, a smaller amount of the same money metal, in the 
place where the transaction is effected. 

Exchange will be at par when the sums of the payments to 
be made to and from any two places, within a given time, 
exactly balance each other. If the sum of the payments to 
be made within a limited period by the merchants of one 
place, say New York, to the merchants of another place, say 
London, is greater than the sum of the payments to be made 
in New York by the merchants of London, then exchange 
on London will be above par in New York ; that is, a New 
York merchant having to pay a debt, within that period, in 
London, will have to pay down more than 1,000 ounces oi 
gold in New York to buy the right to have paid to him, or to 
his creditor, 1,000 ounces of gold in London. 



BALANCE OF TRADE. 45 * 

544. The upward limit of the premium * on bills of 
exchange is the cost of remitting specie. The New York 
merchant, in the case supposed, will not pay more, in addi- 
tion to 1,000 ounces, than the cost of sending 1,000 ounces 
from New York to London, interest, freight, insurance, and 
commissions being taken into account. If the holders of bills 
demand a premium above this, the New York merchant will 
send the metal, and in that way pay his debt. Within the 
limit thus assigned, the premium on bills rises or falls with 
the fluctuations of the market, according to the law of supply 
and demand. 

While, thus, exchange on London is at a premium in New 
York, exchange on New York will, conversely, be at a 
corresponding discount in London. If a New York merchant, 
owing 1,000 ounces of gold in London, has to pay somewhat 
more than that amount, a London merchant, owing 1,000 
ounces in New York, will be able to purchase the right to 
receive that amount there for something less than 1,000 
ounces. The downward limit f of the discount on bills of 
exchange is, again, fixed by the cost of remitting specie. 

545. The Balance of Trade.— We have said that exchange 
between two places will be at par when the sum of the payments 
falling due on the one side is equal to the sum of the payments 
falling due at the same time on the other side. It may happen 
— it frequently does happen — in the trade between countries A 
and B, that country A may at one season of the year have the 
larger payments to make, while in another season the relations 
will be reversed. The exports from the United States, for 
example, tend to take place predominantly in the few months 
following the harvest. At that time the United States becomes 
chiefly a creditor country. The merchants of other countries 
have large amounts to pay in New York, on account of produce 
received ; and consequently exchange on New York is at a 

* Except, of course, in great and sudden emergencies, like the outbreak 
of a war, or the occurrence of a commercial crisis. 

f Except in great and sudden emergencies, as indicated in a previous 
note. 



45 2 POLITICAL ECONOMY. 

premium in London, Paris, Amsterdam, etc. Conversely, 
exchange on London, Paris, Amsterdam, etc., is at a cor- 
responding discount in New York. During the other half of 
the year, the United States generally import more largely 
than they export, and the course of exchange is reversed. 
Bills on London are at a premium in New York, on account 
of large payments to be made abroad ; bills on New York are 
at a discount in London. The discrepancy thus arising from 
the nature of the industry of any given country, between the 
times at which its payments are chiefly to be made and those 
at which it is to receive the bulk of the amounts due to it, on 
account of its own exports, is, in a degree, often very largely, 
removed by bills drawn, as the phrase is, in blank. These are 
bills which do not discharge a debt, but create a debt. Exporters 
often draw such bills, generally with permission obtained in 
advance, upon those to whom they habitually sell or consign 
their shipments, in anticipation of the goods being actually 
dispatched. Such a course is liable to very grave abuses, 
being often resorted to, not merely in promotion of reckless 
and outrageous speculation, but even for the purposes of 
downright swindling ; and the courts and newspapers are 
much given to reflecting severely upon this practice, in general, 
whenever some case of its perversion is brought to light. Yet 
this system of credits, when kept within bounds, confined to 
proper parties, and, as Mr. Goschen says, " jealously and even 
suspiciously watched," serves a very important purpose in 
equalizing the income and outgo of nations and in diminishing 
the extent to which shipments of specie require to be made. 
The point we have now reached introduces the vexed 
question of the Balance of Trade. Few subjects are 
more complicated or more generally misunderstood. The 
question, whether a year's commercial transactions have, 
in the net result, brought a nation more in debt to otheir 
nations than they, in the aggregate, have come to owe to 
it, is commonly decided, offhand, by simple reference to 
the custom-house statistics of the values of exports 
from and imports into that country. Such & test is alto- 
gether fallacious. The statistics of exports and imports, 



COMMERCIAL STATISTICS. 453 

if fairly well collected and compiled, are of great value ; but 
it is necessary, first, to make correction for their internal 
errors, and, secondly, to take into account several elements 
which the custom-house statistics do not undertake to include. 

546. Errors in Commercial Statistics.— The official state- 
ments of imports and exports are more or less disturbed by 
errors from two exactly opposite sources. If the goods 
imported or exported are subject to duties at the custom 
house, the importer or exporter comes under a very strong 
temptation to misrepresent their value or amount. If, on the 
other hand, the goods are free of duty, both the custom-house 
officials and the merchants are liable to become very careless 
in making the required statements as to the quantity of such 
goods, and still more careless regarding statements of value. 

How far these two causes together may result in vitiating 
the official statistics of imports and exports, will, of course, 
depend greatly upon the organization of the civil service, 
upon the general morality of the trading and official classes, 
and upon the integrity and severity with which the laws are 
enforced ; but it is not possible under any organization or 
administration wholly to eliminate errors of importance, from 
one or both of these sources. Imported goods subject to duty 
will be largely undervalued, in spite of all the vigilance of 
honest officials. Exports are probably even more grossly 
undervalued, because being, by the fiscal system of most 
nations, free of duty, even the most honest officials are likely 
to attach little importance to the statements of value, since 
they are aware that no revenue interest of the government is 
concerned therein. 

In addition to these general causes, affecting, though in very 
different degrees, the commercial statistics of all nations, 
there are apt to be special liabilities to error affecting the com- 
mercial statistics of any given country. Thus, with regard to 
the United States, it is found that while a reasonable degree of 
care and pains is taken to ascertain the values of goods 
exported by ocean-going vessels, the statement of our exports 
by rail, by ferry-boat, or by small river and lake vessels to 
Canada and Mexico, are exceedingly defective, so much so as 



454 POLITICAL ECONOMY. 

to be almost wholly worthless. It is notorious that many- 
millions are omitted yearly from our statistics on these 
accounts. 

547. Elements not included in Custom House Statistics.— 
Passing now to elements, other than internal errors in custom- 
house statistics, which require to be taken into account, in 
order to reach the true balance of trade, I will briefly mention 
the most important. The reader who desires to pursue the 
subject, will find it treated in a most interesting and instruc- 
tive manner in Mr. Goschen's work on Foreign Exchanges. 

The principal elements to be considered are, first, the 
exportation or importation of government securities, shares and 
bonds of corporations, titles to property, etc. This is an element, 
which, at times, may rise to an enormous importance ; at other 
times, it may sink into insignificance. It may be considerable as 
between certain countries, while as between either of those 
countries and any other, it may amount to little or nothing. 

During the war of secession the United States sold its bonds 
in Europe * to the amount of hundreds of millions of dollars, 
bringing back arms, ammunition, clothing and other supplies. 
The latter went into the statistics of imports ; while the statis- 
tics of exports took no account of the former. As these bonds 
had many years to run, the value of the goods so imported did 
not enter into the amount to be paid for abroad in those 
years. In the same way, many of our great railroads have been 
built mainly or wholly with foreign capital, shares in the 
stock of those railroads, or more commonly, first-mortgage 
bonds, being sent abroad without passing through our cus- 
tom-houses, while rails and other supplies were brought back 
through the custom-house, thus swelling our tables of imports. 
In like manner, large quantities of foreign goods, of all sorts, 
have been sent to us year after year, in consideration of which 
foreigners have received from us, not our corn, cotton or 
petroleum, but the titles to mines, to agricultural and grazing 
lands, mortgages on western farms, the bonds of cities and 
counties, etc. 

* " To contract a foreign loan is [with regard to the Balance of Trade] 
equivalent to an increase of exportation." — Goschen. 



BALANCE OF TRADE. 455 

The aggregate amount of such securities and titles exported 
from the United States has been enormous, though the move- 
ment has been very irregular from year to year. Nor has the 
current been all one way. When our government began to 
refund its debt at a lower rate of interest — at three and a 
half or three per cent., instead of six or seven per cent., nearly 
all our national bonds which had been held in Europe were 
returned. Now and then some large mass of railroad or city 
bonds are sent back, at maturity, for redemption, — the proceeds 
to be reinvested in other securities, of which the custom- 
house would not take notice, or to be " drawn against " in 
payment for corn or cotton, of which the custom-house would 
take notice. 

While the element which we have been considering is of 
enormous importance to the United States, as affecting the 
balance of trade within any given year, England is the nation 
whose commercial statistics need most to be supplemented 
from this source. Hers has been the greater part of the capi- 
tal which has come to us from Europe, for loan or invest- 
ment ; and for the last forty years she has been doing a sim- 
ilar work in every part of the world, building railroads in Can- 
ada, Australia, Mexico, South America, India and Persia, 
even in France, Germany and Russia, providing capital, out 
of her superabundance, for every species of enterprise in any 
land that promised a profit, and even furnishing the means 
with which half the wars of the present generation have been 
waged. 

548. Interest on Government Securities.— -But while, as 
we have said, it is true that in these modern times, enormous 
amounts of imports or of exports of merchandise are, in the 
case of any given country, set off, not against equal amounts 
of exports or of imports of merchandise, but against shares, 
stocks, bonds, or mortgages, sent abroad or brought home, as 
the case may be, it is also true, that dividends or interest 
on such shares, bonds, etc., become due annually, semi-annu- 
ally, or quarterly, immediately thereafter, and require, there- 
fore, to be added to the amounts which the debtor nations 
have to pay ; which the creditor nations have to receive, 



45 6 POLITICAL ECONOMY. 

thus affecting at once the course of exchange. Some nations 
have to pay millions annually, others, tens of millions, on this 
account. Those nations, which, in some past period have 
spent vast sums in great wars or on costly public improvements, 
without paying for them at the time through taxation, now 
find a certain portion of their exports of merchandise going 
every year to pay the interest on their debts. Against this 
is set nothing of which the custom-house takes notice. No 
goods come back to pay for these exports : only some pack- 
ages of canceled coupons. 

549. Expenses of Fleets on Foreign Stations, etc.— 
Another item which should be added to the imports of a 
country, in making up its current accounts with other nations, 
consists of the expenses of its fleets on foreign stations, or of 
its armies, if in occupation of other countries. In the case 
of great naval nations, this item is not of small importance. 
For a little while after vessels of war leave the home ports, 
their petty expenses may be met with gold taken from home, 
which may or may not have passed the custom-house ; but 
subsequently, the expenses of the fleet will be met by bills of 
exchange, which will be just so much added to the volume of 
bills which represent the commercial imports of the home 
country. 

The expenses of foreign embassies and legations and of 
the consular service stand in the same relation to the imports 
of the country represented. 

550. Expenses of Foreign Travel. — In like manner the 
sums expended by tourists and travelers abroad constitute a 
very considerable item in those accounts which go to deter- 
mine the balance of trade. The good things eaten or drunk 
by our citizens abroad are as much a part of our imports, for 
the purposes of such a computation, as if they had been 
brought to the United States in vessels and had been consumed 
here. Every year, many millions are expended by our citi- 
zens abroad, out of the proceeds of bills of exchange. Mr. 
Goschen states that several millions sterling are annually 
expended by the rich Russian nobility in traveling or in foreign 
residence. 



BALANCE OF TRADE. 457 

551. Tributes, War Indemnities, Etc.— From whatever 
motive an independent country, a colony or a province may 
have occasion to make payments to another power, or to the 
sovereign or mother country, whether that motive be found in 
protection extended, in privileges conceded, in fear of hostil- 
ity, or as a fine for past conduct, such payments affect ex- 
changes in all respects as if they were on account of foreign 
goods imported. Yet, here, again, we have an element of which 
the statistics of commerce take no account. Whenever these 
payments are regular, they affect the course of exchange no 
more, if not less, than ordinary commercial payments. Thus, 
trade and exchange adjust themselves to the tribute paid by 
Java to Holland with perhaps even more of exactness and cer- 
tainty than as if the payments were on account of goods im- 
ported into Java for the improvement of its agriculture, or for 
starting manufactures. On the other hand, an extraordinary 
payment of this character, is likely to produce great and far 
reaching, and it may be long enduring effects upon the mar- 
ket of exchange. The gigantic war indemnity paid by France 
to Germany, in 1871,* notwithstanding the transcendent finan- 
cial skill with which the negotiations were conducted, set in 
motion forces which were felt by trade and industry to the 
remotest parts of the earth. 

552. Freight, Insurance, Profits, Commissions, Etc. — 
But we have not yet reached the largest of the elements 
which determine the balance of trade, of which ordinary com- 
mercial statistics take no account. Let us suppose, for illus- 
tration, that country A imports from ceuntry B goods, whose 
value, at the ports of B, is one hundred and fifty millions of 
dollars, and exports to B goods, whose value, at its own ports, 
is correctly stated at one hundred millions. Now, here is an 
apparent difference of fifty millions of dollars. If, however, 
we can reach the facts regarding the carriage, insurance, etc., 
of these goods, amounting in the aggregate to tAvo hundred 



* A study of the methods used in the payment of this indemnity, and 
of its financial and industrial effects, will constitute an admirable exer- 
cise for a pupil well-grounded in economic principles. 



45 s POLITICAL ECONOMY. 

and fifty millions of dollars, we may find the apparent balance 
greatly modified, in the way either of increase or reduction. 
Suppose, for example, that country A owns all the shipping 
engaged in this traffic ; the charges for freight on its own 
exports might easily reach ten or fifteen millions of dollars, 
which would require to be added to the custom-house valua- 
tion, in order to make up the true balance between the two 
countries. On the other hand, the ten or fifteen per cent, 
charged for carriage on its imports would be paid to its own 
citizens. In the same way country A might do all the 
insurance business relating to both sides of the traffic ; and its 
merchants and factors might conduct all, or nearly all, the com- 
mercial operations involved. In such a case the premiums for 
insurance, the commissions and profits of trade would go still 
further to reduce the apparent balance between the two coun- 
tries. On the other hand that apparent balance might have 
been greatly extended by the fact that all the shipping 
merchants and most of the importers, factors and insurers 
engaged in the traffic belonged to country B. 

The suppositions above made are not in themselves unreason- 
able. It generally happens that, in the commerce between two 
nations, one or the other does by far the larger part, often, 
practically, the whole carrying business,* as well as obtains 
an altogether disproportionate share of the premiums of insur- 
ance, and of the profits and commissions of traffic. 

553. It is not necessary to extend our enumeration to minor 
items of the accounts between trading nations, in order to 
show the reader how greatly the ordinary statistics of imports 
and exports must be corrected and supplemented before we 
can reach a decision as to the amounts by which the payments 
to be made in any given period by one country to any other 
country or to all other countries, exceed the payments due to 
itself. Mr. Goschen states that Russia has more than once, 
in times of peace, as I understand it, so far fallen behind in 

*" An exclusively maritime country could discharge its obligations to 
other countries which supply it with necessaries, simply by becoming their 
carrier, without exporting any produce or manufactures to them in 
return." — Goschen. 



BALANCE OF TRADE. 459 

her dealings with other countries, as to be obliged to contract 
a foreign loan, exporting public securities made for the pur- 
pose, as a means of restoring the balance. Of course, such a 
temporary expedient in the end serves to increase the com- 
mercial and financial difficulties of a country. 

554. Our illustrations have thus far been drawn mainly 
from the commercial transactions of two countries, real or 
supposed. We have perhaps sufficiently shown that, of the 
amount of payments falling due on one side or the other in a 
given period, only the balance will require to be discharged in 
money, the principle of cancellation being applied to all but 
that excess. 

Even this, however, would involve a very much larger use 
of money in the adjustment of national balances than actually 
takes place. Although the total exports of a country will 
always tend to approach its total imports, yet its exports to 
and imports from any single country may be very unequal. 
Thus, the United States import tea, silk, etc., to an enor- 
mous value, from China, while exporting very little to China. 
Again, our imports from England are very large, but our 
exports to that country are vastly greater still. If the United 
States adjusted its accounts with each foreign country sepa- 
rately, the balances requiring to be paid in money during a 
year would rise into hundreds of millions of dollars. 

555. To further reduce the balances to be paid in money ; 
to still further extend the principle of the cancellation of 
indebtedness, resort is had to a common market of exchange 
for all the nations. If, for example, the United States im- 
ports from Great Britain manufactured goods to the value of 
one hundred millions, and exports to Great Britain two hund- 
red and fifty millions, it uses its favorable balance of one 
hundred and fifty millions in London as a sort of bank on 
which to draw for the payment of its indebtedness to many 
other countries from which it imports more than it exports to 
them. For example, it pays its Chinese creditors in accepted 
bills drawn on London importers of American wheat, cotton 
or petroleum. These bills Chinese merchants, having to pay 
for large amounts of English manufactures, are glad to 



460 POLITICAL ECONOMY 

get possession of ; and thus an additional body of indebted- 
ness is canceled. The operation of this force is greatly 
accelerated by the course of events which have made London 
the great settling place for the transactions of international 
commerce.* Prof. Jevons, in his work on " Money and the 
Mechanism of Exchange," stated that there were then (1875) 
no less than sixty important colonial and foreign banks which 
had their own London offices or houses ; and that there were, 
in addition, fully one thousand foreign and colonial houses in 
correspondence with London bankers. Here, then, in this 
Exchange of the World, as Edmund Burke called it, a hund- 
red years ago, meet all the claims of all the creditors in the 
world, and all the acknowledgments of all the debtors in the 
world, which have not been adjusted nearer home. In the 
portfolios of the London banker or exchange broker are 
found bills representing the shipment of every kind of 
agricultural produce, of every class of manufactured goods, 
not to or from England merely, but from the country of pro- 
duction, however distant, to every other country known to 
commerce. And these bills are of all amounts, from the 
pettiest sums up to thousands of pounds sterling, falling due 
at all dates from to-morrow up to this day six months. From 
this varied mass to pick out accepted bills, recognized obli- 
gations which, in amount and time of maturity, shall cancel 
each other, is a work to which the highest intelligence is 
applied. Although the aggregate profits are large, the amount 
of exchanges thus effected is so enormous that the per- 
centage charged for the negotiation is very small. 

556. It is by this complicated agency that the balance of 
payments between nations, requiring to be made in money, is 
reduced to a minimum. Out of hundreds or thousands of 
millions of " exchange " negotiated, the bodies of indebted- 
ness which bankers or brokers can not find means to offset 

* Of this Mr. Goschen says the " primary cause is to be found in the 
stupendous and never-ceasing exports of England, which have for effect 
that every country in the world, being in constant receipt of English 
manufactures, is under the necessity of making remittance to pay for 
them, either in bullion, in produce, or in bills." 



FOREIGN EXCHANGES. 461 

amount to but a few millions. Except for the continuous pro- 
duction of the precious metals in certain countries which 
thereby become gold or silver-exporting countries, and except 
for the acts of government in replacing metal money by paper 
money, or, conversely, in resuming specie payments after 
periods of suspension, or, again, in changing "the standard," 
from silver to gold or gold to silver, the amount of metal 
money which would be required to go, now here and now 
there, to make up for local and temporary failures of coinci- 
dence between the amounts to be received and the amounts 
to be paid, in international trade, would be almost inconsider- 
able, in comparison either with the aggregate of commercial 
transactions or with the total body of the precious metals in use. 

557. Operating Upon the Exchanges The peculiarly 

important and responsible position which London occupies, as 
the center of the exchange transactions of the world, has 
led to the establishment of a well-recognized policy of deal- 
ing with the outflow of gold from that point, whenever such 
a movement is caused by what is called " an unfavorable turn 
of the exchanges." 

In spite of the great perfection to which the cancellation 
of international indebtedness is there carried, it will at times 
happen that a " drain " of bullion continues so long as to 
cause acute alarm as to the integrity of the financial system 
of the kingdom. When the act of 1844 was passed, it was 
believed that the provisions of this law, to the effect that no 
bank note (beyond the fixed amount of fifteen million pounds) 
should be issued except on the actual deposit of an equiva- 
lent amount of specie, and that, conversely, no specie should 
be withdrawn except upon the surrender of an equivalent 
amount of notes, would have the effect, automatically, to 
check a drain, from whatever cause proceeding. Inasmuch- 
however, as the painful experiences of several commercial crises 
showed that this force could not always be relied upon as suffi 
cient,* the directors of the Bank of England have adopted 



*Bagehot's "Lombard Street" will be found most interesting and in- 
structive to an advanced student in economics and finance. 



4^2 POLITICAL ECONOMY. 

the policy of raising the rate of discount, sharply and rapidly,, 
whenever signs of a considerable export of gold shall appear.. 
Of course, the decree of the directors can absolutely control 
the rate of discount only upon the capital which the Bank 
itself has to loan ; but the moral influence of such an act 
upon the joint-stock and private banks and upon individual 
capitalists is naturally very great, and the general rate of 
interest is at once appreciably affected. 

In doing this, the object of the directors of the Bank, who 
deem themselves, by the force of tradition, though not of law,* 
largely responsible for the financial integrity of the kingdom, 
is so to raise the rate of interest, or of discount, as to induce 
foreign creditors, who have the right, at the time, to demand 
gold from England, to leave that gold for awhile in England, 
thus checking a "drain" which is considered dangerous. By 
raising the rate of interest at once, from three or four to six 
or eight f per cent., the profit on the investment of funds in 
England is made so great that any foreign creditor, who is 
not absolutely required by his financial circumstances to draw 
his money away to his own country, feels a strong induce- 
ment to leave it still longer in England. 

It is in this way that the financial authorities of the kingdom 
seek to "tide over" a highly unfavorable state of the 
exchanges ; and it may be said that the policy, although 
involving a resort to means which are altogether artificial and 
highly exceptional in finance, uniformly proves successful. 
" The fact," said Mr. Goschen, " has been that almost every 
advance in the bank rate of discount is followed by a turn of the 
exchanges in favor of England. Foreign creditors give their 
English debtors a respite, and prefer to wait longer for remit- 
tances, gaining interest meanwhile at the profitable English 
rate." 

558. The Special Case of England and the United States.— 
We have said all that the limits of our space will allow concern- 

* Walker : Money, Trade and Industry, pages 293-98. 
f The Bank has, in pursuance of this policy, more than once raised 
the rate of discount as high as eleven per cent. 



BI-METALLISM. 4 6 3 

ing foreign exchange in general. A word may, however, be 
added regarding the exchange between England and the 
United States. The valuation, in American money, of the 
English pound sterling, has been several times changed. Prior 
to 1792, the pound sterling was valued at $4.44 4-9, according 
to the bullion standard of the Spanish dollar, then universally 
current among us. From that date down to 1834, the Ameri- 
can dollar was worth 97^ cents in gold, at which rate a 
pound sterling was worth $4.56-£ cents. By the coinage 
act of 1834 our standard was so reduced that the bullion 
contained in the American dollar was worth only 9l£ cents, 
so that the pound sterling became worth about $4.87. The 
United States custom-house valuation of the "sovereign," 
that is, the coin representing the English pound sterling, was, 
however, fixed at $4.84. By this difference in bullion value 
between our dollar and the English standard money, a fictitious 
par of exchange was created between England and the United 
States, so that an American stock or bond worth $100 in New 
York, would be quoted in London at about $109, whenever the 
amounts respectively to be paid and received between the two 
countries were equal. 

By an act of Congress of January, 1874, the custom- bouse 
valuation of the English sovereign was again changed, this 
time to $4.87 65 / 100 , at which point it now remains. The Lon- 
don stock exchange responded to this action, the same year, by 
valuing the American dollar at four English shillings, equiva- 
lent to about 97^ cents of our money, from which it results 
that American stocks or bonds worth $100 are quoted in Lon- 
don at about $102.75, subject to variations on account of the 
fluctuations in commercial transactions. 

XIV. 

BI-METALLISM. 

559. The question of Bi-metallism is to be decided solely 
upon the principles which have been laid down in Part III., as 
governing the value of money ; but the question is one of so 
much popular interest and has been so confused by the pas- 



464 POLITICAL ECONOMY. 

sionate controversy waged over it, that it may be worth while 
to set the points at issue fairly forth, for the assistance of the 
beginner in economics. 

And first let us depict the situation, in view of which the 
controversy has arisen. 

560. The Gold-Using Countries — We find one group of 
States, of great importance in international commerce, whose 
habits of trade make gold money, or bank notes predicated 
upon a reserve of gold money, the most agreeable and con- 
venient medium of exchange. These are rich countries, hav- 
ing vast accumulations of wealth, derived from the industry 
of the past. In them, because their productive power is large, 
wages are high. In them, trade and industry are organized 
with a great degree of complexity and minuteness. It is not 
needful for our present purpose to name all the countries pf 
this group ; but clearly it embraces England, France, Bel- 
gium and Holland, in Europe, and on this continent, the 
United States. 

It is admitted, that, in these countries, the use of silver as 
the ordinary money of trade would be attended with great 
inconvenience, and would meet so much prejudice on the part 
of the people as to render it inexpedient for any government 
to propose the introduction of that metal as the sole money of 
full legal-tender power. These countries, howe'ver, use a large 
amount of silver as fractionary money, for the purpose of 
making change in transactions, and for retail purchases. 

561. The Silver-Using Countries.— On the other hand, 
we find a group of countries, embracing an aggregate number 
of inhabitants several times greater than those previously 
mentioned, in which the facts of industry and the habits of 
the people respecting exchange are such as to make gold an 
impossible money. Such countries, beyond a doubt, are 
Ohina and India, where the ordinary wages of labor range 
from two to eight cents a day. There are other countries 
— some in Europe and some in America — settled by the people 
of Southern Europe, in which wages range from twelve to 
thirty cents a day, in some of which the ordinary use of gold 
as money can not be pronounced exactly impossible ; yet 



BI-METALLISM. 4^5 

where reasons, both of practical convenience and of sentiment 
and habit, give a decided preference to silver for that pur- 
pose : a preference so decided that it is not reasonable to 
anticipate that these countries will soon, if ever, pass over 
from the silver-using to the gold-using group of countries. 
The group of countries in respect'to which we have spoken of the 
use of silver money as more consonant with the facts of industry 
and the habits of the people than the use of gold, comprise 
the Spanish American states, Russia, and most, if not all, of 
the southern states of Europe. 

I have said that it is not necessary for our present purpose 
that all commercial countries should be named on the one 
side or the other of the dividing line drawn. Controversy 
might easily arise as to the proper location of Italy or 
Germany,* perhaps also of Austria ; but we have no call to 
undertake the question. It is enough if it appear not only 
that there is one great group of states which, in fact, use gold 
as their principal money, and another great group which use 
silver, but that the preference for the one metal or the other 
is so far determined by economic causes, such as the rate of 
wages, the degree of accumulated wealth, etc., as to make it 
highly probable that the two money metals will continue to be 
used, as now, each within a wide field that is peculiar to itself. 

562. What the Bi-Metallist Proposes.— It is this situation 
which the bi-metallist has in view when he propounds his 
scheme. Accepting the existence of a large group of coun- 
tries in which gold naturally circulates as money and another 
in which silver is so used, he proposes to create a league of 
states, some of which are what we may, for brevity, call silver 
states, and some, gold states, which shall, each for itself, but 
by simultaneous action, establish the free coinage f of the two 

* If, for example, Germany were resolved into its constituent States, 
several would naturally gravitate towards the gold-using group ; more, 
still, towards the silver-using group. In like manner, Northern Italy 
might go to the gold-using group, while Southern Italy would tend the 
other way. 

f The distinction between free and gratuitous coinage is noted in 
par. 196. 



466 POLITICAL ECONOMY. 

metals, making the money of one metal to be legal-tender 
indifferently with money of the other metal, in payment of 
debts, at a certain ratio determined upon in advance by the 
consenting states. Say, for example, 15^ dwt. of silver to 1 
dwt. of gold, the ratio adopted by the states of the Latin 
Union, viz., France, Italy, Belgium and Switzerland. The 
bi-metallist asserts that, if such league be formed between a 
considerable number of important commercial countries, even 
though it does not embrace all countries, the relative value of 
gold and silver will be kept close to the mint-ratio so estab- 
lished. 

When asked what is the object in view in such an interna- 
tional arrangement ; what advantage is anticipated of suffi- 
cient importance to make it worth while to endeavor to over- 
come the natural reluctance of nations to bind themselves to 
act in common respecting matters which touch their sov- 
ereignty, to make it worth while to resort to international 
conferences and congresses, the bi-metallist adduces two con- 
siderations which he alleges to be of vast importance to the 
world's trade and industry. 

563. A Par of Exchange* Desired between Gold Coun- 
tries and Silver Countries. — The first is the establishment 
of a par of exchange between silver-using and gold-using coun- 
tries. 

We saw (par. 543) that between two countries having the 
same money metal, a par of exchange exists. This par of 
exchange is realized whenever the sum of the payments to be 
made in one country by merchants of the other country, within 
a certain brief period, is equal to the sum of the payments to 
be made in the latter by the merchants of the former country, 
in which event a merchant paying down a certain amount, 
say 1,000 ounces, of the common money metal, say gold, in 
his own country, can thereby purchase the right to receive, 
himself, or through his agent or representative — his creditor, 
let us suppose — 1,000 ounces of that metal in the country in 



* The question of foreign exchanges has been treated under a preceding 
title. 



Bl-ME TA LLISM. 4 6 7 

question. Exchange will, in fact, fluctuate about this par of 
exchange, now above and now below, according to the move- 
ments of supply and demand, as these are determined by the 
relative amounts of debts to be paid and of payments to 
be received, respectively, in the course of trade between the 
two countries. The outside limits of these movements of 
exchange are, as we saw, fixed by the cost of exporting or 
importing specie. 

But between two countries having money of different metals, 
say of gold in one country and of silver in the other, there is 
no par of exchange, irrespective of a bi-metallic league like 
that under consideration. Wholly in addition to the usual 
movements of exchange, the question, how much gold an 
Indian merchant can obtain the right to receive in London, 
by paying down a certain amount of silver in Calcutta, de- 
pends on the silver price of gold and the gold price of silver, 
at the time. And as the two metals have their separate 
sources of supply, and, to a certain extent, independent uses, 
whether in the arts or as money, their respective values are 
likely to fluctuate greatly. 

564. It is a necessary result of this that much more uncer- 
tainty is involved in trade between a gold and a silver coun- 
try than between two gold countries, or two silver countries : 
the chances of undeserved losses or unearned gains are greatly 
increased. No merchant in a silver country selling to a gold 
country, no merchant in a gold country selling to a silver 
country, can know for how much of the metal which forms 
the money of the country to which he exports his wares he 
must sell them, in order to make himself good for the metal 
which he has expended at home in producing or purchasing 
them. 

The English merchant who sells to Calcutta or Hong Kong 
or Mexico, may do all that lies within him with the highest 
wisdom and skill ; he may buy the right sort of goods and buy 
them at a bargain, ship them at the proper season to the best 
market, sell them at the highest ruling prices, and bring the 
proceeds safely home to Liverpool, yet a fall in silver, between 
the sale of the goods and the receipt of the proceeds, may 



468 POLITICAL ECONOMY. 

strip him of all the profits of his venture, of all the fruits of 
the year's business, or even entail a heavy loss upon him. 

It is true that, in one sense, what one merchant in an indi- 
vidual case loses, some other merchant, or some banker, or 
some speculator, may gain. But it is not true that unearned 
gains encourage industry to the extent to which undeserved 
losses discourage it. On the contrary, not only does the good 
done almost always fall far short of compensating for the evil 
wrought, but it often happens that, as mercy between man 
and man blesses both him that gives and him that takes, so 
the sums of wealth transferred by speculation or accident, not 
only leave the loser grieving and crippled, but curse and blight 
him whom they seemingly enrich. 

565. Now this grievous disadvantage under which inter- 
national trade suffers, the bi-metallist professes to be able to 
remove, through the scheme that has been described. It is 
not now the question whether this can, indeed, be done ; but 
whether the result be desirable, and, if so, whether desirable 
in a degree to justify a considerable effort, perhaps some sac- 
rifice. 

It is one of the accidents of the controA^ersy over this ques- 
tion that the mono-metallist writers are estopped from deny- 
ing that this result would, if practicable, be desirable in a very 
high degree. There are but few of those writers who have 
not, in discussion of the effects of inconvertible paper money, 
treated the loss of a par of exchange with foreign nations (par. 
220) as a serious disaster. In dealing with such a case, for exam- 
ple, as that of France between 1871 and 1877, they have attrib- 
uted most unfortunate consequences to the inconvertibility of 
the money of the Republic into that which was the money of 
the commercial world, even though the notes of the Bank of 
France were at a very slight, often hardly appreciable, dis- 
count. In the same way these writers, during the continuance 
of the American suspension, 1862 to 1879, were accustomed 
(and rightly) to attribute to the inconvertibility of the green- 
backs most injurious effects upon the trade and production of 
the United States, and this, even after the premium on gold 
had sunk to a low average, and had ceased to fluctuate vio- 



BI-METALLISM. 469 

lently or rapidly. " Any degree of depreciation, however 
small, even the liability to depreciation, without its reality," 
to use Mr. Bagehot's phrase, was declared to be a cause of 
mischief, to be eradicated by the most heroic efforts of the 
suffering nation, at almost any sacrifice. 

566. The Greater Stability of Value in Bi-metallic Money. 
— A second benefit which, according to the bi-metallist claim, 
would result from the establishment of an international league 
for the free coinage of both metals, as indifferent legal tender, 
at a certain fixed ratio, in payment of debts, is that the two 
metals, thus bound together, would constitute a better money 
than either metal by itself could be. The inequalities of min- 
ing production would tend in a degree to equalize each other, 
with the result of greater uniformity in the production of the 
compound mass, and hence of greater steadiness in the value 
of money. 

Here, again, the mono-metallists are at a controversial disad- 
vantage. In order to establish the impracticability of the 
bi-metallic scheme, they have dwelt strongly on the tendency 
of the two metals to vary widely in value, and this view is 
fully borne out by the facts of the last three or four centu- 
ries.* But this argument against the practicability of the 
bi-metallic scheme virtually amounts to an admission of the 
merits of that scheme, if found practicable. 

* Take the present century only, for illustration. When the century 
opened, silver was in course of rapid production. Three dollars' 
worth of silver was taken out, where one dollar's worth of gold was pro- 
duced. Then came the series of South American and Mexican revolts 
and revolutions, between 1809 and 1829, by which mining machinery was 
destroyed, mining populations scattered, and the most prolific mines of 
the world closed. Mr. Jacob estimates that the stock of the precious 
metals in civilized hands fell off one-sixth in those twenty years. But 
gold now came in to fill the void. In 1823, the mines of the Oural began 
to yield largely, while about 1830 the gold sands of Siberia became 
known. And now only 68 cents' worth of silver was produced to a 
dollar's worth of gold. 

In 1848 and 1851 came the gold discoveries of California and Australia, 
and so altered was the relative production of the two metals that only 27 
cents' worth of silver was taken out, to a dollar's worth of gold ! After 
1861, however, the facts of production became more favorable to silver. 



47° POLITICAL ECONOMY. 

I think it must be conceded, on this statement, that the 
bi-metallic scheme, if it could be carried out so as to realize the 
expectations of its advocates, would confer very great benefits 
upon international trade, and, by consequence, upon the pro- 
duction of wealth.* 

567. Is it Practicable? — Let us, then, inquire what are the 
economic conditions of the case ; how far it is reasonable to 
believe that this scheme could be successfully established. 

What is the force to which the bi-metallist looks to restrain 
the tendency to divergence between the values of the two 
money metals, silver and gold ? It is evident that any rational 
scheme to influence value must aim at affecting either supply 
or demand. Can, tben, government influence the supply of or 
the demand for a money metal ? Clearly, unmistakably, yes. 
Government can in a very great degree influence the demand 
for either of the money metals by coining it into money and 
conferring on the coin legal tender power. 

In 1873 began a still further movement in the same direction. The 
director of the United States mint estimated the world's production of 
gold in 1884 at one hundred and two million dollars, and of silver (at 
16 : 1 of gold) at one hundred and sixteen million dollars. 

* I do not here present the argument from the status in favor of the 
remonetization of silver in Europe and America, as money of full legal 
tender power, at a certain ratio to money of gold, under free coinage. 
That argument has respect to the vast bodies of debts and fixed charges, 
both public and private, contracted before the German demonetization of 
silver (say, 1873). It is urged that to require these debts, whether interest 
or principal, or both, to be paid in money whose purchasing power has 
been enhanced by the diminution of its volume through the extrusion of 
silver (except as small change) from the money system of Europe and 
America, will prove both a grievous injustice, as between debtor and credi- 
tor, and a great source of injury to trade and production. The English eco- 
nomic statisticians are generally agreed that the purchasing power of 
gold has largely increased since the German demonetization. How 
far this has been in consequence of that demonetization, is matter of dis- 
pute. The aggregate amount of national debts is now stated at 
$27,000,000,000. There are, in addition, vast bodies of public or politi- 
cal indebtedness, on the part of counties, cities and towns. Then we 
have the enormous mass of corporate (industrial), and private debts, the 
burden of which (at any time) depends primarily upon the purchasing 
power of the money in which interest or principal is to be paid. 



BI-ME TALLISM. 47 l 

To illustrate this, let us suppose that, in any country, both 
gold and silver are made legal tender in payment of debts, at 
the ratio of 15^ of silver to 1 of gold : that is, the law decrees 
that a debtor may extinguish an obligation by the payment of 
coins containing a certain number of ounees of gold, or, at his 
option, coins containing fifteen and a half times that number 
of ounces of silver. Let it be assumed that, at the moment of 
the decree, this was the actual market ratio between the 
metals. 

Let it now be supposed that causes, natural or commercial, 
that is, affecting the supply of one metal or the other, 
or affecting the demand for the one or the other, begin 
to operate to produce a divergence from this ratio : say, to 
make an ounce of gold worth 15.60 ounces of silver, what will 
occur ? The bi-metallic principle will at once begin to act in 
restraint of this movement toward divergence. How will it 
operate ? Through the desire of every debtor to meet his 
maturing obligations in the cheapening metal. All debtors 
will, in the case supposed, seek silver. This extension of 
demand acts directly in contravention of the force which is 
lowering its value. On the other hand, the metal — gold — 
which is tending to become dearer, from that fact falls out of 
demand. No debtor seeks it as the means of paying his debts. 
This diminution of demand at once operates in counteraction 
of the forces tending to raise the value of gold. 

568. The Opinion of Mono-Metallic Writers.— Now, is 
this a purely fanciful view of the subject, taken only by advo- 
cates of the bi-metallic scheme ? On the contrary, it has been 
seen in operation over extensive countries, of great commercial 
importance, through long periods of time ; and the validity of 
the cause is fully confessed by mono-metallic writers of the 
highest reputation. 

M. Chevalier, the eminent French economist, writing of this 
system as it prevailed in his own country in 1857, when, in 
consequence of the great gold discoveries in California and 
Australia, gold was tending to fall and silver to rise, and thus 
to pull away from the mint ratio of 15^ : 1, then established 
in France, speaks thus emphatically: "Whilst this state of 



47 2 POLITICAL ECONOMY. 

things lasts, it will be impossible at London, Brussels, Ham- 
burg, or even at New York, or at any other great center of 
commerce, for gold to fall much below 15| times its weight 
in silver." And Prof. Cairnes, writing of the same period, 
said : " The crop of gold has been unusually large ; the 
increase in the supply has caused a fall in its value ; the fall 
in its value has led to its being substituted for silver ; a mass 
of silver has thus been disengaged from purposes which it was 
formerly employed to serve ; and the result has been that the 
two metals have fallen in value together.'''' 

Mr. Bagehot wrote in the London Economist : " Whenever 
the values of the two metals altered, these [bi-metallic] coun- 
tries acted as equalizing machines ; they took the metal which 
fell, they sold the metal which rose ; and thus the relative 
value of the two was kept at its old point." 

And the late Prof. Jevons, writing in 1874, under the title, 
the Equivalence of Commodities (see par. 142), says : " It is 
upon this principle that we must explain the extraordinary 
permanence of the ratio of exchange of gold and silver : that 
this fixedness of ratio does not depend tipon the amount and 
cost of production is proved by the very slight effect of the 
Australian or Californian discoveries." 

And elsewhere Prof. Jevons thus illustrates the compensa- 
tory action of the two metals : " Imagine two reservoirs of 
water, each subject to independent variations of supply and 
demand. In the absence of any connecting pipe, the level of 
the water in each reservoir will be subject to its own fluctua- 
tions only. But, if we open a connection, the water in both 
will assume a certain mean level, and the effects of any exces- 
sive supply or demand will be distributed over the whole 
area of both reservoirs. 

" The mass of the metals, gold and silver, circulating in 
Western Europe in late years, is exactly represented by the 
water in these reservoirs, and the connecting pipe is the law of 
the 7th Germinal an XI,* which enables one metal to take the 
place of the other as an unlimited legal tender." 

* French revolutionary style for the year 1803, the date commonly 
assigned to the establishment of the bi-metallic system in France. 



BI-METALLISM. 473 

589. Bi-Metallism not a Chimera.— We see, thus, that 
the bi-metallic scheme is based upon economic principles which 
are incontestable. If it be worth while for any nation to 
undertake this work of holding silver and gold together, it 
can do so just as long as it has any considerable quantity of 
the metal which at the time tends to become dearer, to dis- 
pose of. If it be worth while for any group of nations to 
undertake this, they can maintain the approximate equivalency 
of the two metals just as long as their joint stock of the metal 
which at that time tends to become dearer remains unex- 
hausted. Every additional state that joins the bi-metallic 
group strengthens the system in two ways, first, by con- 
tributing to the supply of the metal which may, under the 
natural or commercial conditions prevailing at the time, tend 
to become dearer, and, secondly, by withdrawing itself from 
the list of States which may possibly contribute to the demand 
for that metal. 

570. The Operation Illustrated.— We may suppose the 
commercial world to be divided into sixteen states, A to P, the 
first six having the single gold standard ; four, G to J, the 
so-called double standard of gold and silver, under the 
bi-metallic system : say at 15-| : 1 ; the remaining states hav- 
ing the single standai-d of silver, thus : 

A, B, C, D, E, F, (G, H, I, J,) K, L, M, N, O, P. 

It is evident that, in the event of a change in the condi- 
tions of supply tending to cheapen silver relatively to gold, 
the new silver would pass into the countries of the double 
standard, G to J, and be there exchanged for gold, at the 
rate of 15^:1, with some small premium as the profit of 
the transaction, and, as a result, the gold displaced from 
the circulation would be exported to the gold countries, A 
to F, in settlement of trade balances. 

The rapidity with which this substitution of silver for 
gold in the bi-metallic states will proceed must depend, 
first, on the force of the natural causes operating to cheapen 
silver ; and, secondly, on the force of the commercial causes 
operating to maintain or advance the value of gold. The 
length of time during which the drain of the dearer metal 



474 POLITICAL ECONOMY. 

can be sustained without exhaustion, will (given the rate of 
movement) depend solely upon the stock of that metal 
existing in the bi-metallic states when the drain begins. 

But chief among the causes operating to advance the value 
of gold, is the exclusive power with which gold is invested 
by law to pay debts in states A to F ; while the stock of the 
dearer metal available to sustain the drain described, is 
made up, not of all the gold in the sixteen states A to P, or 
in the ten states A to J, but only of the gold in the four bi- 
metallic states, G to J. 

Now, let us suppose the sixteen commercial states to be 
somewhat differently divided, as follows : 

A, B, C, D, (E, F, G, H, I, J, K, L,) M, N, O, P. 

The bi-metallic system is now not twice merely, but many 
times as strong, since not only is the amount of the dearer 
metal subject to drain increased, but the demand for that 
metal, in preference to silver at 15^ : 1, now comes from four 
countries only, instead of six, as formerly. 

The transfer of still another state from each of the two 
dingle-standard groups, would vastly increase the stability of 
the bi-metallic system. 

A, B, C, (D, E, F, G, H, I, J, K, L, M,) N, O, P. Not 
only would the base of the system be broadened by bringing 
the dearer metal of ten states, D to M, under tribute, in the 
event of changes operating on the supply of either metal ; 
but the force threatening the equilibrium of the system would 
be reduced, since the demand for the dearer metal would now 
come from only three states : A, B, C, in the case of a cheap- 
ening of silver relatively to gold ; N, O, P, in the case of a 
cheapening of gold relatively to silver. Those three states 
can not take the dearer metal indefinitely. They would soon 
be surfeited. A further increase of money in them would be 
followed by a fall in its value, which would soon proceed so 
far as to bring the metals together again. 

And it is to be noted that, with a bi-metallic league embrac- 
ing so many states, those which tended naturally to the use of 
silver as money would continue to use silver predominantly ; 
those which tended to use gold would still use gold as their 



THE REVENUE OF THE STATE. 475 

main money of circulation. Whenever causes began to 
operate to cheapen silver relatively to gold (at the mint ratio 
between the two metals established by the league), the gold 
using countries would take some additional silver and discard 
some gold ; but this increase of demand for silver and dimi- 
nution of demand for gold would check the movement to 
divergence before the character of the circulating medium 
became greatly changed. In the event of a cheapening of 
gold relatively to silver, the substitution of gold for silver, in 
the silver-using states, to the extent only of a small fraction 
of their circulation, would suffice to put a stop to the move- 
ment. 

571. This is the bi-metallic scheme. The question of 
securing the co-operation of independent states to any end, is 
a political, not an economic question : that is, the desired end 
is to be obtained by the action of governments, moved by 
various considerations and interests, and not by the laws of 
trade. 

Our limits will not permit us to enter into a discussion of 
the causes which have, since 1874, suspended the bi-metallic 
policy of the Latin Union, or of the probabilities of the future 
respecting the indifferent use of gold and silver as money. 

XV. 

THE REVENUE OF THE STATE. 

572. The revenue of the State may be derived from : 
I. Voluntary Contributions.* 

It is, to most of us, difficult to conceive a state of society 
where the expenses of government should be met through 
spontaneous self -assessment ; yet, in a more primitive condi- 
tion, such a state of things has existed widely, f and in a 
few happy instances has come down nearly to our day. 

* Voluntary Taxation, says Emile de Girardin, it is the State stimu- 
lated ; it is the State economical ; it is the State Republican and Demo- 
cratic. 

f The words Dona, Benevolences, etc., in the history of revenue, 
testify to the original assumption that contribution was voluntary. 



47 6 POLITICAL ECONOMY. 

The papal revenues * may perhaps be brought under this 
title. Adam Smith cites Hamburg, Basle, Zurich, Under- 
wald, Holland, and other communities, where the self -valuation 
of the citizen was accepted. 

An American, f long resident in Europe, thus describes his 
experience in a community where the principle of self -assess- 
ment still survived : 

"For four years it was the good fortune of the present 
writer to be domiciled in one of these communities. Incredi- 
ble as it may seem to believers in the necessity of a legal 
enforcement of taxes by pains and penalties, he was, for that 
period, by law and usage, in the strictest sense of the term, 
his own assessor and his own tax gatherer. In common with 
the other citizens, he was invited, without sworn statement or 
declaration, to make such contribution to the public charges 
as seemed to him just and equal. That sum, uncounted by 
any official, unknown to any but himself, he was asked to 
drop, with his own hand, into a strong public chest ; on doing 
which, his name was checked off the list of contributors, his 
duty done." 

573. II. Lucrative Prerogatives, Public Property, and 
State Enterprise. 

The following may be named as the chief sources of reve- 
nue under this head : 

(1.) Rent-charges in favor of the state as the proprietor of 
all lands. This has been fully discussed under the title : the 
Nationalization of the Land (pars. 496-505). 

(2.) Escheat : the principle that the state is the proprietor 
of all property to which individual titles or claims are lost. 
This principle was early established in all countries whose 
legal or fiscal history we know. 

It is evident that the scope of this principle will widen or 

*The Pope was the greatest capitalist of the Middle Ages. The 
British Parliament at one time declared the revenues derived from the 
people of that Kingdom by the Pope to be five times as great as those 
obtained by the Crown. 

•j- Rev. Dr. Warren, President of Boston University. 



THE REVENUE OF THE STATE. 477 

contract in correspondence with the laws regulating the 
descent and hequest of property and prescribing the times 
and modes of proving claims. Under the feudal system, 
escheat constituted a most important source of revenue. In 
England, the right of devising real property did not exist 
after the Conquest, until the time of Henry VIII. Modern 
society, however, has given continually wider extension to the 
power of bequest and the principle of inheritance, until 
escheat has ceased to be of much importance. 

In 1795, the great English law reformer, Jeremy Bentham, 
in a pamphlet entitled, " Escheat vice Taxation," propounded 
a scheme by which the entire revenue of the state should be 
derived from this source. 

Bentham proposed an extension of the existing law of 
escheat, " a law coeval with the very first elements of the Con- 
stitution," and a corresponding limitation of the power of 
bequest. The effect intended was to be " the appropriating to 
the use of the public all vacant successions, property of every 
denomination included, on the failure of near relations, 
will or no will, subject only to the power of bequest, as here- 
inafter limited." 

By near relations, he means " such relations as stand within 
the degrees termed prohibited with reference to mar- 
riage." 

Further, in the case of " such relations within the pale as 
are not only childless, but without prospect of children," he 
proposes, that, instead of taking their share in money, they 
should take only the interest of it for life. 

"As to the latitude to be left to the power of bequest," he 
writes, " I should propose it to be continued in respect to the 
half of whatever property would be at present subject to 
that power." 

Bentham argues that in the distribution of property there 
is no sense of hardship but in proportion to disappointment : 
expectation thwarted. " Hardship," he says, "depends upon 
disappointment ; disappointment upon expectation ; expecta- 
tion upon the dispensations, meaning the known dispensations, 
of the law." 



478 POLITICAL ECONOMY. 

If, therefore, the law were so framed, distant relations* 
would not expect to succeed ; would consequently not be dis- 
appointed ; and would consequently suffer no hardship. 

574. (3.) Fines and forfeitures for Criminality and Delin- 
quency. Since government exists largely for the protection 
of life, property and labor, the cost of maintaining govern- 
ment and administering justice might properly be drawn, if 
it were found possible, from the delinquent and criminal class. 

In feudal times, fines and forfeitures constituted a very 
important source of revenue to the crown. 

(a) The relation of the tenant to the lord was a personal 
one, and any failure in personal loyalty, though it did not be- 
come a crime against society, was punished by heavy fines or 
hj total forfeiture. 

(b) The crimes of those days were largely political, and 
political offenders are likely to be men of wealth and position. 
The Wars of the Roses were so fruitful of forfeitures that a 
large proportion of the land became the property of the 
crown. 

In the present age political crimes have become compara- 
tively infrequent, and the criminal class are now mainly 
drawn from the poor, who are not proper, perhaps not possible, 
subjects for pecuniary exaction. 

Hence this branch of public revenue has shrunk into com- 
parative insignificance. Fines and forfeitures pay a part of 
the expense of strictly judicial establishments, especially of 
the lower or police courts ; but they add little to the general 
receipts of the state. 

(4.) Tributes from colonies, dependencies and conquered 
nations, including war fines, requisitions and indemnities. 

The subject is a fascinating one ; f but I must resist the 
temptation to enlarge upon it. 

* The principle of Bentham's proposal is sanctioned by the legacy and 
succession duties of England, which exact ten per cent, from strangers, 
and only one per cent, from children. 

f It would be specially interesting to compare the system of exaction 
practiced by the Greeks, Carthaginians and Romans, in ancient times, 
and by the Dutch and Portuguese, in modern times, with the English sys- 



THE REVENUE OF THE STATE. 479 

575. (5.) The sale of offices, honors and titles. 

This source of revenue makes a very prominent figure in 
the history of finance ; but has, at present, mainly a curious 
interest. 

The sale of offices, titles, etc., by the state, may fall into 
several different categories. 

(a) The sale of offices of dignity and honor, as in the 
case of the patents of nobility, granted by James I.* of Eng- 
land, the effect of which merely is to lower the real honor and 
dignity of such offices, perhaps with only a political and social 
retribution. 

(b) The sale of offices, as under many of the Popes, which 
carry salaries in the nature of annuities terminable by death, 
the price paid representing, more or less exactly from the 
actuarial point of view, the capitalized value of the annuity. 

(c) The sale of offices, as once practiced largely in France, 
which carry exemptions from political burdens and from 
taxes. This amounts simply to a sale of the rights of the 
state in respect to taxation, and is, in effect, an anticipation of 
revenue. A government which was in such straits as to 
resort to practices like these would be likely to make a very 
bad bargain for itself ; and so in France it proved. 

" As the finances became more embarrassed," says M. de 



tem of seeking the interest of the mother country, or the conquering 
country, in the right to impose navigation laws and commercial restric- 
tions, and in the benefits of patronage in officering the public service of 
colonies and dependencies. 

* The sum paid to constitute a Baron was £10,000 ; a viscount, £15,000, 
an Earl, £20,000.— Taylor, Hist, of Taxation in England. 

" The price of the dignity of a Baronet," says Taylor, "was equivalent 
to £1095, ninety-three of whom were created." 

These are instances of the sale of offices to willing purchasers. James' 
son, Charles I., undertook the sale of his offices to his subjects, willy 
nilly. He revived the feudal practice of " Knight's Fee," and compelled 
persons holding land of a certain yearly vaiue to come up and be 
knighted, or submit to a fine for contumacy. Brodie says, ' ' Charles did 
not restrict it to men of landed property, but included lessees, merchants, 
and others." — Hist. Br. Empire. 



4&o POLITICAL ECONOMY. 

Tocqueville, "new offices were created, with exemptions 
from taxation or privileges by way of salary ; and as they 
were created to supply the wants of the treasury and not the 
requirements of the public service, an immense number of them 
were useless or positively mischievous. 

" As early as 1664, when Colbert instituted an inquiry into 
the subject, it was discovered that the capital invested in this 
miserable business nearly amounted to 500,000,000 livres. It 
is said that Richelieu abolished 100,000 offices. They rose 
anew, under fresh names. For a trifle of money, the state 
bartered away the right of directing and controlling its own 
servants. The net result of this system was a government 
machine, so vast, so complicated, so cumbrous, and so ineffi- 
cient that it was actually found necessary to let it stand idle, 
while a new instrument, constructed with more simplicity and 
better adapted for use, performed the work which these count- 
less functionaries wei'e supposed to do." 

It was Louis XII. who systematized the sale of offices, and 
Henry IV. who first sold hereditary ones. 

(d) The sale of offices, as notably under the Roman Em- 
pire, which carry rights, privileges and exclusive opportuni- 
ties by which the purchaser may reimburse himself for his 
outlay, either through a monopoly or through the collection 
and disbursement of the public revenue. 

576. (6.) Domains (L'Etat Capitaliste.) 

Even under the modern European principle of the private 
ownership of land, the state is, in all countries, the possessor 
of larger or smaller domains from which a revenue may be 
derived. 

It is the habit of writers on finance to speak, and perhaps 
justly, in the most disparaging tone of the administration of 
public estates, for productive uses.* Adam Smith expresses 



* M. Leroy Beaulieu dwells upon the distinction between the property 
of the State, which is left to the enjoyment of the community, or which 
is devoted to government uses, and that which is sought to be adminis- 
tered productively. The former he terms domaine public ; the latter 
domaine prive de V Etat 



THE REVENUE OF THE STATE. 481 

himself in the strongest terms. " The servants of the most 
negligent master are better superintended than the ser- 
vants of the most vigilant sovereign." Referring to his own 
country, he says : " The crown-lands of Great Britain * do 
not, at present, afford the fourth part of the rent which could 
probably be drawn from them, if they were the property of 
private persons. If the crown-lands were more extensive, it is 
probable they would be still worse managed." And, not to 
disparage English administration too greatly, he adds : " In 
the present state of the greater part of the civilized monar- 
chies of Europe, the rent of all lands in the country, managed 
as they would probably be if they all belonged to one pro- 
prietor, would scarce amount, perhaps, to the ordinary revenue 
which they levy upon the people, even in peaceful times." 

However much this statement might require to be modified 
with respect to the management of government property in a 
country like Germany, with its admirable civil service and 
its systematic administration of public trusts, no one would 
think of questioning the full literal truth of Adam Smith's 
declaration if applied to our own country, with its civil ser- 
vice based upon the principles of rotation in office and appoint- 
ment as the reward of partisan activity. 

Of the present Enropean States, Russia, Prussia, Bavaria, 
Sweden, and Hanover, derive considerable revenue from pub- 

* Did our space allow, it would be interesting to refer to the aliena- 
tions and resumptions and renewed alienations of the Crown-lands, 
through the reigns of the Tudors and the Stuarts. Strangely enough, it was 
that model financier, William III., who effected the greatest havoc among 
the royal domains. One can scarcely read of the wholesale squandering of 
the property of the Crown by this monarch, without the suspicion that he 
clearly saw the coming on of the modern system of finance, when the 
necessities of the state should be met, no longer by rents and fines and for- 
feitures and escheats and purveyance, but by systematic taxation ; and 
that, in something like contempt for the feudal sources of revenue, he 
purposely chose to dissipate the patrimony on which his predecessors had 
relied. " At the end of William's reign," says Sir E. May, "Parliament, 
having obtained accounts of the state of the land revenues, found that they 
had been reduced by grants, alienations, incumbrances, reversions, and 
pensions, until they scarcely exceeded the rent-roll of a squire." 



482 POLITICAL ECONOMY. 

lie domains, the first named being so pre-eminent in this res- 
pect that M. Cherbuliez * mentions it as almost the only 
state which draws a notable proportion of its revenue from 
such a source. 

577. (7) State Enterprise (L'Etat Entrepreneur). — What- 
ever the disabilities of the state in acquiring a revenue from 
the rental or sale of property, whether that consist of agri- 
cultural lands, or mines, or forests, or fisheries, or phosphate 
deposits, those disabilities are greatly increased when the state 
undertakes the management of commercial or manufacturing 
business, f The state as capitalist is at no small disadvantage ; 
as entrepreneur, that disadvantage is vastly aggravated. 

Yet the rule of failure, on this side of governmental agency 
is not unbroken. Dr. Smith mentions the republic of Ham- 
burg as deriving a considerable revenue from a public wine 
cellar and from an apothecary's shop. The profits of bank- 
ing \ have been realized in a notable degree by several cities, 
among them Hamburg, Venice and Amsterdam. The post- 
office can be made, and has been made, " to pay," and that 
handsomely. If the post-office in the United States is not a 
source of revenue, it is because our 'people have chosen to 
make it an agency for promoting the settlement of the coun- 
try. The business of distilling in Russia, of sugar refining in 
Egypt, and of opium manufacture in British India, have been 
made the subject of no inconsiderable pi'ofit to government, 

* Science Economique. Worth mentioning in this connection are the 
sugar plantations, private property of the Khedive of Egypt, the guano 
deposits of Peru and Chili, and the mahogany forests of Honduras, on 
the credit of which vast loans have been obtained, within recent years, 
in the London market. 

f Adam Smith remarks that no two characters are more inconsistent 
than those of trader and sovereign. " If the trading spirit of the English 
East India Company rendered them very bad sovereigns, the spirit of 
sovereignty seems to have rendered them equally bad traders." 

% The Prussian Bank in 1874 declared dividends of 12 3-4 per cent. 
One-half the net gains of the bank go to the state. The United States was 
a partner to the extent of one-fifth in the bank of 1791-1811, and again in 
that of 1816-1836. 



QUASI TAXES. 483 

The supply of towns in the matter of water, and, in a smaller 
number of instances, of gas, has been attempted, not unsuc- 
cessfully, by municipal governments. 

The instance which goes furthest to contradict the generally 
received opinion of the hopeless incapacity of the state to 
conduct industrial enterprises, is afforded by the railways of 
Germany. 

578. III. Quasi Taxes.— The following may be named as 
sources of revenue under this head : 

(1.) Monopolies conferred upon individuals or corporations, 
in consideration of a capital sum paid down, or of a share in 
the resulting profits. 

Monopolies have played a conspicuous part in the history of 
public revenues; and, in spite of the spirit of the age which 
is, in general, strongly opposed to exclusive privileges of man- 
ufacture and sale, they still form a prominent feature in the 
budget of many countries of Europe. 

Monopolies may be commercial, industrial or financial. 
The distinction between the monopolies of the past and those 
of the present day is marked. Formerly monopolies were 
granted, for the profit of the government, to persons and 
corporations to carry on a vast variety of operations,* great 
and small alike, most of which were susceptible of private 
management. 

* The story of the rapid extension of monopolies in England under 
Elizabeth, of the indignation aroused thereby throughout the realm, and 
of the submission of the haughty Tudor to the rising storm, is familiar 
to every school-boy. Hume remarked that, had Elizabeth's system of 
monopolies been continued, the England of his day would have contained 
as little industry as Morocco or the coast of Barbary. 

Charles I. played the same game as Elizabeth, and aroused an equal 
popular indignation, until even the subservient judges kicked at the 
restraints everywhere imposed upon trade. 

Says Brodie, after referring to the soap monopoly: "Almost every 
article of ordinary consumption, whether of manufacture or not, was 
exposed to a similar abuse ; salt, starch, coals, iron, wine, pens, cards and 
dice, beavers, felts, bone-lace, etc., meat dressed in taverns, tobacco, 
wine casks, brewing and distilling, lamprons, weighing of hay and 
straw in London and Westminster, gauging of red herrings, butter-casks, 



484 POLITICAL ECONOMY. 

Such were the monopolies of the 17th and 18th centuries. 
To-day, under the light of political economy, all prudent gov- 
ernments restrict the principle of monopoly to a very few 
highly important interests, and, by preference, to those which 
in their nature tend toward monopoly. Thus Bentham, that 
arch enemy of monopolies, proposed the collection of large 
revenues from bankers, who were to be compensated by a 
monopoly within their several districts, on the ground that 
banking was a business tending to monopoly. 

In the same way, taxes on railway goods and passenger 
traffic in England and France have been defended, even by 
free-traders, on the ground that railway transportation is nec- 
essarily very much of a monopoly ; that full and effective 
competition can rarely be introduced and never long main- 
tained ; and that the state may, therefore, accepting the fact 
of a substantial monopoly, properly derive a profit therefrom. 

But there are also certain special interests of great commer- 
cial importance, in every way fitted for private management, 
which, on account of their high capability for yielding reve- 
nue, some enlightened nations still constitute exceptions to the 
principle of open public competition. 

Among the subjects thus specially excepted from the prin- 
ciple of competition, are opium, salt, tobacco and matches. 

579. — (2.) Lotteries. This needs only to be mentioned as 
a source of revenue largely made use of, in the past, and still 
forming an important feature in the budgets of many civilized 
countries. Of the moral and social objections* to this system 
of raising money, we are not called to speak here. Econom- 
ically speaking, there can be no doubt that, while lotteries 
afford a most effective means of securing a present revenue, 

kelp and seaweed, linen cloth, rags, hops, buttons, hats, gutstring, spec- 
tacles, combs, tobacco, pipes, etc., saltpeter, gunpowder, in short, articles 
down to the sole gathering of rags, were all under the fetters of monopo- 
lies, and consequently deeply taxed." 

* It is to be noted that the laws against private lotteries which, doubt- 
less, did much to educate that public sentiment which now makes even 
public lotteries impossible in many countries, originated in the desire to 
secure to the state the profits of this source of gain. 



REVENUE OF THE STATE. 4^5 

appealing, as they do, to one of the strongest passions of 
human nature, they yet, in their ultimate effect, weaken the 
state by discouraging patient industry, and thus impair the 
revenue capabilities of any people among whom they come to 
be extensively employed. In two of the states of the Ameri- 
can union, lotteries are still conducted under government pat- 
ronage. Every one is familiar with them as agencies for col- 
lecting money for charitable and religious associations. 

580. — (3.) Purveyance. — The right of buying provisions 
and other necessaries for the use of the royal household, at an 
appraised valuation, in preference to all other purchasers and 
even without the consent of the owner, might have been 
included among the " lucrative prerogatives " mentioned under 
a former head, or may indifferently be regarded as a quasi 
tax. Once extensively practiced, purveyance is now greatly 
restrained and confined, and in almost all highly civilized 
countries is wholly discontinued — except during actual war, 
or in the case of a royal progress. 

581. — (4.) Fees. — A fourth mode of raising revenue, which 
partakes largely of the nature of a tax, without bearing its 
form, is through the exaction of fees for stated or occasional 
services performed by the agents of the State. 

So far as fees are, in the phrase of Gamier, not fiscal, that 
is, so far as they constitute merely a return for the expense 
to which the individual receiving the benefit has put the state, 
on his own behalf, they do not come under the present title. 
We are only concerned here with fees exacted by the state as 
a means of revenue, in excess of the expense to which the 
state is put by the performance of the service, and where, 
perhaps, the so-called service is itself interposed only as an 
occasion for the imposition of a tax, as in the case of many 
custom-house services. 

Into the same category would properly fall all the fees 
exacted from individuals where the main benefit is received 
by the community, even though the aggregate of such receipts 
should not equal the expense to the state of maintaining some 
necessary service. Judicial fees are often of this nature, the 
cost of obtaining the adjudication of a great principle having 



486 POLITICAL ECONOMY. 

been formerly thrown upon single individuals, who were fre» 
quently less benefited than thousands of others by the deci- 
sions reaehed. This system was fiercely attacked by Bentham. 

" Who goeth to warfare at any time at his own charges ? 
saith St. Paul. It is the poor litigant who makes war upon 
injustice." 

It is also fairly a question whether the maintenance of the 
ordinary roads of a country is not, in such a sense and in so 
far, a general charge, that fees, under the name of tolls, con- 
stitute a quasi tax, instead of being, according to the assump- 
tion on which they are collected, the price paid by the 
individual for a service rendered to himself directly and 
exclusively. 

Of other forms of quasi taxes (5) seigniorage on the coin, 
and (6) the issue of paper money, enough has been said in 
Part III. 

582. IV. Taxation in its Various Forms.— Taxation may 
be considered (a) according to its ultimate Bases, which may 
be Rent-bearing land, Wealth, Revenue, Faculty, or Expendi- 
ture, one or all of these. 

The first we have already discussed under the title " The 
Nationalization of the Land." A tax on rent, we have seen, is 
not a general tax. It does not fall upon those members of the 
community who do not own land. It does not affect the price 
of produce. It amounts merely to the assumption, or usurpa- 
tion, as one is disposed to regard it, by the state, of the 
surplus of produce above the cost of cultivating the no-rent 
lands. 

A tax upon the no-rent lands, either by themselves, or in 
common with other lands, is a tax on produce. 

583. Again, taxation may be considered (b) with reference 
to the equities of contribution. In this connection we might 
discuss : 

(1.) The Physiocratic theory of Taxation. The French 
Physiocrats (par. 48) holding, as they did, that land, alone of 
all agencies of production, yields a return above the cost of 
production, proposed, thereupon, to make land yield all the 



REVENUE OF THE STATE. 4^7 

revenue of the state, as a measure both of justice and of 
political expediency.* 

This tax is to be distinguished from the assumption by the 
state of the Unearned Increment of Land, as proposed by Mr. 
Mill and his associates. The latter, as we have seen, would 
not raise the price of produce. The former would do so, and 
was intended to do so. 

But, with the complete refutation of the physiocratic theory 
of production fell the physiocratic scheme of taxation. 

(2.) The Social Dividend Theory of Taxation, which is, in 
effect, that the members of the community should contribute 
to the public support in proportion to the benefits they derive 
from the protection of the state, or according as the services 
they receive cost the state more or cost it less. 

(3.) A group of theories respecting the equities of taxation, 
differing „not greatly among themselves, which give rise, 
respectively, to what we may call the-equality-of-sacrifice 
rule ; the rule of contribution-according-to-ability, and the 
leave-them-as-you-find-them rule. 

It is in discussing the theories of this group that the ques- 
tion of progressive taxation arises. That question is common 
to all the theories of this group. 

(4.) We have the view taken by Mr. McCulloch,f in 
despair of reaching the equities of the case, which may be 
called the purely economic theory of taxation. The discus- 
sion of this theory brings up the whole question of the diffu- 
sion or " repercussion " of taxes. 

* "lis etablissent d' abord que la terre seule donne un revenu net, c'est- 
a-dire, un revenu qui excede les depenses necessaires pour l'entretien des 
cultures et des cultivateurs ; ils etablissent ensuite que ce revenu net est 
la source qui alimente tous les au J es revenus ; ils en concluent qu'il est 
inutile de poursuivre les revenus mobiliers a travers les mille canaux ou 
ils circulent : qu'il est plus commode et plus juste de les atteindre a leur 
source, et ils aboutissent a la theorie de l'impot unique sur le revenu 
fonder." — Clamageran: Hist, de l'impot en France. 

f "The distinguishing feature of the best tax is, not that it is most 
nearly proportioned to the means of individuals, but that it is easily- 
assessed and collected, and is, at the same time, most conducive to the 
public interests." 



438 POLITICAL ECONOMY. 

584. (c.) The foregoing discussions are introductory to 
the consideration of any specific tax or group of taxes, or 
existing tax system, respecting which we may inquire how 
far it answers the requirements of equitable contribution, or, 
on the other hand, if we abandon the rule of equity altogether 
— as did Mr. McCulloch — how far it secures to the state the 
needed revenue, with a minimum of irritation to the public 
mind, with a minimum of expense and loss in collection, and 
with a minimum disturbance to trade and industry. 

XVI. 

THE PBINCIPLES OF TAXATION. 

585. Inadequacy of the Literature of Taxation. — Accord- 
ing to an eminent German financier, Hoffmann, it would be 
difficult to find, in the whole realm of political economy, a sub- 
ject more generally misconceived, more disfigured by false 
views, more degraded by a partial study, than Taxation. 
" If," adds M. de Parieu, author of the ablest French work on 
the subject, " this proposition appeared true in a country 
where the problem of instruction in administration has for a 
long time been studied, it is probably still more so in France, 
where the practice is even further separated from the science 
of administration." 

586. The body of English literature in finance is extremely 
unsatisfactory.* Adam Smith, indeed, gave to taxation about 
one-fourth of his Wealth of Nations; but his treatment shows 
little grasp of the subject, at any point; while his ignorance of 
the law of rent goes far to vitiate his general views. Ricardo 
dealt with taxation, at great length ; and as a study of the 

* I have been severely blamed for using language even stronger than 
this, in former editions of this work. I dare say my statements were too 
sweeping. Mr. Newmarch's papers on public debts and Mr. Gladstone's 
Budget speeches are never to be mentioned without honor. Mr. Robert 
Giffen, Prof. Cliffe Leslie, Mr. Inglis Palgrave, and Prof. Thorold 
Rogers have made important contributions to many questions touching 
local or imperial taxation. 



LITERATURE OF TAXATION. 489 

propagation of an economic impulse from object to object, 
and from class to class, his discussion is masterly. But 
Ricardo's underlying assumption of perfect competition 
has necessarily resulted in conclusions which are widely 
inconsistent with the facts of industrial society. J. R. 
McCulloch discussed taxation and the funding system in 
a distinct treatise, which is not without value. Later English 
contributions to finance have, with few exceptions, either 
been trivial in character or have been confined to single 
phases of the general subject. No great, comprehensive 
English work on Taxation exists. 

587. Perhaps we shall get as good an idea of the inconse- 
quence of the English literature in this department, as can be 
obtained in any other way, by referring to Adam Smith's 
maxims respecting taxation. Dr. Smith proposed four 
maxims,* or principles, " which," says Mr. Mill, " having 
been generally concurred in by subsequent writers, may be 
said to have become classical." A vast deal of importance has 
been assigned by English economists to these maxims. They 
have been quoted over and over again, as if they contained 
truths of great moment; yet if one examines them, he finds 
them, at the best, trivial ; while the first and most famous of these 
can not be subjected to the slightest test without going all 
to pieces. 

588. The Social Dividend Theory of Taxation.—" The 
subjects of every state," says Dr. Smith, " ought to contribute 

* " I. The subjects of every state ought to contribute towards the support 
of the government as nearly as possible in proportion to their respective 
abilities ; that is, in proportion to the revenue which they respectively 
enjoy under the protection of the state. 

"II. The tax which each individual is bound to pay ought to be certain 
and not arbitrary. The time of payment, the manner of payment, the 
quantity to be paid, ought all to be clear and plain to the contributor, 
and to every other person. 

" III. Every tax ought to be levied at the time, or in the manner, in 
which it is most likely to be convenient for the contributor to pay it. 

" IV. Every tax ought to be so contrived as both to take out and to keep 
out of the pockets of the people as little as possible over and above what 
it brings into the public treasury of the state." 



49° POLITICAL ECONOMY. 

towards the support of the government as nearly as possible 
in proportion to their respective abilities; that is, in proportion 
to the revenue which they respectively enjoy under the pro- 
tection of the state." 

This maxim, though it sounds fairly, will not bear examin- 
ation. What mean those last words, " under the protection 
of the state " ? They are either irrelevant, or else they mean 
that the protection enjoyed affords the measure of the duty 
to contribute. But the doctrine that the members of the 
community ought to contribute in proportion to the benefits 
they derive from the protection of the state, or according as 
the services performed in their behalf cost less or cost more to 
the state, involves the grossest practical absurdities. Those 
who derive the greatest benefit from the protection of the 
state are the poor and the weak — women and children and the 
aged ; the infirm, the ignorant, the indigent. 

Even as among the well-to-do and wealthy classes of the 
community, does the protection enjoyed furnish a measure of 
the duty to contribute ? If so, the richer the subject or citi- 
zen is, the less, proportionally, should he pay. A man who 
buys protection in large quantities should get it at wholesale 
prices, like the man who buys flour and meat by the car-load. 
Moreover, it costs the state less to collect a given amount 
from one taxpayer than from many. 

Returning to the maxim of Dr. Smith, I ask, does it put for- 
ward ability to contribute, or protection enjoyed, as afford- 
ing the true basis of taxation ? Which ? If both, on what 
principles and by what means are the two to be combined in 
practice ? 

589. Taxation According to Ability.— But if we take the 
last six words as merely a half -conscious recognition of the 
social-dividend theory of taxation, and throw them aside, we 
shall still find this much-quoted maxim far from satisfactory : 
" The subjects of every state ought to contribute towards the 
Bupport of the government as nearly as possible in proportion 
to their respective abilities ; that is, in proportion to the reve- 
nue which they respectively enjoy." 

But is the ability of two persons to contribute necessarily in 



THE PRINCIPLES OF TAXATION. 491 

proportion to their respective revenues ? Take the case of 
the head of a family having an income of |500 a year, of which 
$400 is absolutely essential to the maintenance of himself and 
wife and children in health and strength to labor. Is the 
ability of such a person, who has only $100 which could possi- 
bly be taken for public uses, one half as great as that of an- 
other head of a family similarly situated in all respects except 
that his income amounts to $1000, and who has therefore 
$600 which could conceivably be brought under contribution ? 
Manifestly not. 

We shall, then, still further improve Dr. Smith's maxim if 
we cut away all after the first clause : " The subjects of every 
state ought to contribute towards the support of the govern- 
ment as nearly as possible in proportion to their respective 
abilities." The maxim as it stands is unexceptionable, but 
does not shed much light on the difficult question of assess- 
ment. 

590. The Leave-them-as-you-find-them Rule of Taxa- 
tion. — The best statement I have met of the principle of con- 
tribution based on ability is contained in an article in the 
Edinburgh Review of 1833 : " No tax is a just tax unless it 
leaves individuals in the same relative condition in which it 
finds them." What does the precept, which we may call the 
leave-them-as-you-find-them rule of taxation, demand ? In 
seeking an answer to this question, let us inquire, historically, 
what bases have been taken for assessment. Leaving out 
Rent-Bearing Land, whose fiscal relations have been suffi- 
ciently dwelt upon, we note four : 

1. Contribution has been exacted on the basis of Realized 
Wealth, commonly spoken of as Capital. 

2. On the basis of Annual Income, or Revenue. 

3. On the basis of Faculty, or native and acquired power of 
production. 

4. On the basis of Expenditure, or the individual consump- 
tion of wealth. 

These are the four historical bases of taxation. Let us see 
how far each in turn answers the requirement of the Edin- 
burgh Reviewer's maxim that the tax ought to leave the mem- 



49 2 POLITICAL ECONOMY. 

bers of the community in the same relative condition in which 
it finds them. 

And, first, of Realized "Wealth. Wealth is accumulated by 
savings out of revenue. If, then, wealth alone is to be taxed, 
it is saving, not production, which contributes to the support 
of the state. Economically there can not be a moment's doubt 
that for government thus to draw its revenue from only that 
part of the produced wealth of the community which is 
reserved from immediate expenditure, must be prejudicial. 
The question also arises, where is the political or social justice 
/ of such a rule of contribution ? If my income belongs to me, 
to spend for my own comfort and gratification, without any 
deduction for the uses of the state, why should I lose my right 
to any part of it because I save it ? To tax realized wealth is 
to punish men for not consuming their earnings as they re- 
ceive them. Yet it is eminently for the public interest that 
men should save of their means to increase the capital of the 
v country. 

591. Revenue as the Basis of Taxation.— Turning to Rev- 
enue, it would seem, on the first thought, that we had reached 
a rule of equitable contribution. Yet the rule of contribution 
according to revenue is subject to grave impeachment. 

Here are two men of equal natural powers. One is active, 
energetic, industrious ; he toils early and late and realizes a 
considerable revenue, on a portion of which the state lays its 
hand. The other lets his natural powers run to waste ; trifles 
with life, lounges, hunts, fishes, gambles, and is content 
with a bare and mean subsistence. Was his duty to contribute 
to the support of the state different in hind or degree from that 
of the other f If not, how has his idleness, shiftlessness, worth- 
lessness, forfeited the state's right to a contribution from him in 
proportion to his abilities f 

We must, I think, conclude that, while to tax wealth instead 
of revenue is to put a premium upon self-indulgence in the 
expenditure of wealth for present enjoyment, to tax revenue 
instead of faculty is to put a premium upon self-indulgence in 
the form of indolence, the waste of opportunities, and the 
abuse of natural powers. 



THE PRINCIPLES OF TAXATION. 493 

592. Expenditure as the Basis of Taxation.— Passing for 
the moment by our third title, we find that the fourth basis 
taken for taxation has been Expenditure. This must not be 
confounded with taxes on consumption, as constituting a part 
of a tax system in which taxes on realized wealth, taxes on 
revenue, taxes on faculty, one or all of these, also appear. 
Nor do we speak here of taxes on expenditure imposed in 
practical despair of an equitable distribution of the burdens of 
government. We are now concerned with expenditure only 
as the single basis of taxation, in the interest of political 
equity. 

" It is generally allowed," wrote Sir William Petty, two 
hundred years ago, " that men should contribute to the pub- 
lic charge but according to the share and interest they have 
in the public peace ; that is, according to their estate or riches. 

" Now, there are two sorts of riches, one actual and the 
other potential. A man is actually and truly rich according 
to what he eateth, drinketh, weareth, or in any other way 
really and actually enjoyeth. Others are but potentially and 
imaginatively rich, who, though they have power over much, 
make little use of it, these being rather stewards and exchangers 
for the other sort than owners for themselves. 

" Concluding, therefore, that every man ought to contribute 
according to what he taketh to himself and actually enjoyeth, 
the first thing to be done is," etc., etc. 

Arthur Young seems to have had the same view. After 
saying that every individual should contribute in proportion 
to his ability, he added in a note : " By ability must not be 
understood either capital or income, but that superlucration, 
as Davenant called it, which melts into consumption." 

In this view, so far as any one possesses wealth in forms 
available for the future production of wealth, he is regarded 
as a trustee or guardian, in that respect and to that extent, of 
the public interests. Just this is said by Young — taxes " can 
reach with propriety the expenses of his living only. If they 
touch any other part of his expenditure, they deprive him of 
those tools that are working the business of the state." 

593. Fallacy of this Doctrine.— I do not see but that, if 



494 POLITICAL ECONOMY. 

capital, or revenue in excess of personal expenditure, is to be 
exempted from taxation, on the plea that it has not yet 
become the subject of individual and exclusive appropriation, 
and is, therefore, presumably held and used in a way which 
primarily benefits society, the state has the right to inquire 
whether the use made or proposed to be made of wealth is 
such as will, in fact, benefit society, and benefit society, more- 
over, in the highest degree of which it is capable. 

The citizen says to the state, " You must not tax this wealth 
because I have not yet appropriated it exclusively to myself. 
Indeed, I am going to use it for the benefit of society." The 
state rejoins : " Yes, but of that we must satisfy ourselves. 
We must be the judge whether your use of your wealth will 
benefit society. Pay your taxes, and you can do with your 
wealth as you like. Claim exemption on the ground of pub- 
lic service, and you rightfully come under state supervision 
and control." 

The fallacy of the theory we are considering lies in the 
failure to recognize the fact that the selfish and exclusive 
appropriation and enjoyment of wealth are inseparable from 
its possession. The pride of ownership, the social distinction 
which attends great possessions, the power which wealth con- 
fers, are additional to the merely sensual enjoyment to be 
derived from personal expenditure. Would I resent the 
interference of the government, or of my neighbors, in the 
management of my property, upon the ground that it was not 
being used in the best way ? What is that resentment but the 
proof of a personal appropriation, an exclusive appropriation, 
of that wealth ? My resentment would spring out of the 
deeply seated feeling that my management of my own prop- 
erty is my right : and that he who should deprive me of it 
would take from me what is as truly mine as the right to eat, 
drink, wear, or otherwise consume and enjoy any portion 
of it ; that, short of absolute mental incapacity, it is my pre- 
rogative to control my own estate, even though not to the 
highest advantage of the community, or even of myself : 
though not wisely or well. In other words, I am not a 
trustee, but a proprietor. 



THE PRINCIPLES OF TAXATION. 495 

594. The Dangerous Nature of this Doctrine.— This doc- 
trine of the Trusteeship of Capital is not more irrational than 
it is socially dangerous. It is held by men who are fierce in 
denouncing graded taxation as confiscation ; yet it is, in its 
very essence, communistic. If the owner of wealth is but a 
trustee ; if " his tools are working the business of the state," 
then the real beneficiary may enter and dispossess the trustee 
if any substantial reason for dissatisfaction as to the manage- 
ment of the property exists ; the state may take the tools into 
its own hands and " work its business " for itself. 

595. Faculty as the Basis of Taxation.— I reach, then, 
the conclusion that Faculty, the power of production, consti- 
tutes the only theoretically just basis of contribution ; that 
men are bound to serve the state in the degree in which they 
have the ability to serve themselves. 

I think we shall more clearly see Faculty to be the true 
natural basis of taxation if we contemplate a primitive com- 
munity, where occupations are few, industries simple, realized 
wealth at a minimum, the members of the society nearly on a 
level, the wants of the state limited. Suppose, now, a work 
of general concern, perhaps of vital importance, requires to be 
constructed: a dyke against inundation, or a road, with 
occasional bridges, for communication with neighboring 
settlements. What would be the rule of contribution '? Why, 
that all able-bodied persons should turn out and each man 
work according to his faculties, in the exact way in which he 
could be most useful. 

In regard to a community thus for the time engaged, we 
note two things: first, no man would be held to be exempt 
because he took no interest in the work ; he would not be 
allowed to escape contribution because he was willing to 
relinquish his share of the benefits to be derived, preferring to 
get a miserable subsistence for himself by hunting or fishing ; 
secondly, between those working, a higher order of faculties, 
greater muscular power, or superior skill would make no dis- 
tinction as to the time for which the individuals of the com- 
munity should severally remain at work. 

596. The Ideal Tax. — This is the ideal tax. It is the form 



49 6 POLITICAL ECONOMY. 

of contribution to which all primitive communities instinct- 
ively resort. It is the tax which, but for purely practical 
difficulties, would afford a perfectly satisfactory measure of 
the obligation of every citizen to contribute to the sustentation 
and defense of the state. Any mode of taxation which 
departs in essence from this involves a greater or smaller sac- 
rifice of the equities of contribution ; and any mode of tax- 
ation which departs from this in form is almost certain to 
involve a greater or smaller departure in essence. 

And it deserves to be noted that the largest tax of modern 
times, even in the most highly organized societies of Europe, 
the obligation of compulsory military service, is assessed and 
collected on precisely this principle. 

597. The Faculty Tax Impracticable.— But while the tax 
on Faculty is the ideal tax, it has usually been deemed 
impracticable, as the sole tax, in a complicated condition of 
industrial society. As occupations multiply and the forms of 
production become diversified, the state can not to advantage 
call upon each member, by turns, to serve in person for a 
definite portion of each day or of the year. Hence modern 
statesmanship has invented taxes on expenditure, on revenue, 
on capital, not as theoretically just, but with a view to reduce 
the aggregate burden on the community, and to save produc- 
tion and trade from vexation and obstruction. 

598. We recur to the Tax on Revenue.— The politicians 
of the existing order, as we have seen, shrink from the effort 
involved in levying the public contributions entirely, or even 
chiefly, according to faculty. Next in point of political equity 
comes the tax on incomes, or the revenues of individuals. 
That tax, as we now contemplate it, is a tax on the revenues of 
all classes, with exception only of the amount requisite for the 
maintenance of the laborer and his family, after the simplest 
possible manner, in health and strength to labor. It is not a 
compensatory tax, constituting a part of a system in which real- 
ized wealth and various forms of expenditure are also brought 
under contribution, but the sole tax imposed by the state. 

599. Exemption of the Actual Necessaries of Life.— It 
has been said that from such an income tax the necessary cost 



THE PRINCIPLES OF TAXATION. 497 

of subsistence must be exempted. Mr. D. A. Wells has, 
indeed, laid down two propositions: first, that "any income 
tax which permits of any exemption whatever is a graduated 
income tax ; " and, secondly, that " a graduated income 
tax to the extent of its discrimination is an act of con- 
fiscation." But the exemption of a certain minimum 
annual revenue is a matter of sheer necessity, whether the 
state will or no. Economically speaking, it is not possible to 
tax an income of this class. A man in the receipt of such an 
income can not contribute to the expenses of government. 
Should the state, with one hand, take any thing from such a 
person as a taxpayer, it must, with the other, give it back 
to him as a pauper. 

Conceding the exemption, on purely economic grounds, of 
the amount required for the maintenance of the laborer's fam- 
ily, one of the most vital questions in finance arises imme- 
diately thereupon, to wit : shall the excess above the mini- 
mum, shall the superfluity of revenue, which may be spent or 
saved at the will of the owner, be taxed at a uniform rate, or 
at rates rising with the increase of income ? 

600. The Question of Progressive Taxation. — The ques- 
tion of progressive taxation has always been one of great 
interest while the fiscal policy of states rested with the 
wealthy and well-to-do classes. It is certain to acquire vastly 
greater importance as political power passes more and more 
into the hands of the class of small incomes. 

Upon the question of the equity of progressive taxation 
writers on finance are divided. One party holds that any 
recognition of this principle is sheer confiscation: the other 
admits that progressive taxation may be carried to a certain 
point without injury either to the sense of political justice or 
to the instincts of industry and frugality, some even holding 
with J. B. Say that " taxation can not be equitable unless its 
ratio is progressive." Both parties agree that there is great 
danger that, under popular impulse, progressive taxation may 
be carried so far as not only to violate all the equities of con- 
tribution but seriously to shock the habits of acquiring and 
caving property. 



49 8 POLITICAL ECONOMY. 

The system of progressive taxation prevailed at Athens. 
There were four Solonian classes of citizens, arranged accord- 
ing to wealth. Of these the first paid no taxes ; the class 
next above them were entered on the tax-hooks at a sum 
equal to five times their income ; the next class at ten times 
their income ; the richest class at twelve times their income. 

The principle of graduation, or progressive taxation, was a 
favorite one with the statesmen of the French Revolution. 
It was for a time adopted by the Convention in 1793. In con- 
sequence, perhaps, of the appetite thus created among the 
people for laying the burdens of government mainly on the 
rich, many of the later French writers on finance have been 
very strenuous in denouncing the principle. 

Yet this system was approved, as we saw, by Say, and also 
by Montesquieu. In the personal tax, wrote the latter, " the 
unjust proportion would be that which should follow exactly 
the proportion of goods." Referring to the Solonian Cate- 
gories at Athens, he said : " The tax was just, though it was 
not proportional. If it did not follow the proportion of goods, 
it did follow the proportion of needs. It was judged that 
each had equal physical necessities, and that those necessities 
ought not to be taxed; that the useful came next, and that it 
ought to be taxed, but less than what was superfluous; and 
lastly, that the greatness of the tax on the superfluity should 
repress the superfluity." 

In 1848, at the Revolution, the idea of progressivity was 
revived. The provisional government in a decree, said : 
" Before the Revolution taxation was proportional ; then it 
was unjust. To be truly equitable, taxation must be progress- 
ive." 

M. Joseph Gamier, editor of the Journal des Economistes, 
makes a distinction between progressive taxation, properly so 
called, and progressional taxation. It is, he says, against the 
first that all the objections are directed which we find in 
writers who declare that progressive taxation is a species of 
confiscation, tending to the absorption of great fortunes by 
the state, to the leveling of conditions, to the destruction of 
property, to the discouragement of frugality and industry, to 



PROGRESSIVE TAXATION. 



499 



the emigration of capital. There is, M. Gamier holds, a 
species of increasing taxation which is rational and discreet, 
to which he applies the term progressional, which is held 
within moderate limits, which is collected by virtue of a tariff 
of duties slowly progressive, and which, at the maximum, 
can not pass beyond a definite portion of the income of the 
individual. 

In Prussia the tax on small incomes, known as the Klas- 
sensteuer, is levied on a scale of twelve degrees. 

In England the principle of progression has never been ad- 
mitted into the income tax further than is involved in the 
exemption of a certain minimum. How the subtraction of a 
constant amount from all incomes, and the taxation of the 
excess at a uniform rate, causes the rate on the total incomes 
to rise, from lowest to highest, will appear from the following- 
table. 

601. The Effect of Exemptions.— If we suppose the con- 
stant amount exempted to be $1,000, and the rate of taxation 
on the excess to be ten per cent., incomes of different amounts 
will in effect be taxed as follows : 



Income. 


Income subject to 
Taxation. 


Amount of Tax. 


Rate of Taxation on 
Total Income. 


$1500 


$ 500 


$ 50 


3.33 + per cent. 


2000 


1000 


100 


5 


2500 


1500 


150 


6 


3000 


2000 


200 


6.66+ " 


3500 


2500 


250 


7.14+ " 


4000 


3000 


300 


7.5 « 


4500 


3500 


350 


7.77+ " 



But while the principle of progressivity has never been ad- 
mitted into the income tax of England, it has been extensively 
applied to the so-called " Assessed Taxes ;" that is, taxes on 
carriages, horses, servants, etc. 

602. The question of progressive taxation is a' nice one in 
theory, while in its practical application it is beset with the 
gravest difficulty, arising out of the instincts of spoliation 
which are deeply rooted in the human breast, an inheritance 



500 POLITICAL ECONOMY? 

from ages of universal warfare and robbery. The appetite 
for plundering the accumulated stock of wealth, once aroused, 
may become a formidable social and political evil. 

Were the highest human wisdom, with perfect disinterest- 
edness, to frame a scheme of contribution, I must believe that 
the progressive principle would in some degree be admitted ; 
but in what degree, and by what means, I am at a loss to 
suggest. 

That progressive taxation would be the demand of triumph- 
ant socialism, as it was of the Revolutionists of 1793 and 1848, 
we already know. That progressive taxation will be urged in 
the spirit of spoliation and confiscation, is most probable. The 
friends of the existing order will do well to be prepared to 
take their ground intelligently and maintain it with firmness 
and temper. 

603. A Tax on Revenue Impracticable as the Sole Tax.— 
While, as the sole tax, the tax on revenue has been approved, 
on grounds of political justice, by many, perhaps most, 
writers on finance, it has, like the tax on faculty, generally 
been rejected as impracticable, in view of difficulties in assess- 
ment, affecting incomes both high and low, more indeed the 
higher than the lower, and difficulties of collection, affecting 
especially incomes of the lowest class. Few writers of reputa- 
tion, have, without qualification, advocated such an income 
tax as both politically expedient and economically advan- 
tageous. Fewer statesmen have had the courage to propose 
it to the legislature. 

Revenue, or income, having, then, been abandoned generally 
throughout modern society as the sole basis of taxation, and 
only in exceptional cases forming even an important feature 
of existing tax systems, Expenditure has been resorted to 
increasingly, in the past and present century, from considera- 
tions not so much of political equity as of political and fiscal 
expediency. By far the greater portion of the revenue of the 
most advanced states is derived from taxes on consumption, 
as they are called ; and every new demand of the treasury is 
met mainly from this source. 

Yet even now Wealth is still employed in many communities 



REVENUE OR CAPITAL? 5 QI 

as the sole basis of taxation, the measure of the obligation to 
contrioute to the support of government. It was the pre- 
ferred form of taxation throughout the American colonies. 
It is still the principal form of non-federal taxation in the 
United States, as the Grand Lists of townships, cities and 
counties testify. 

604. Is a Tax on Capital Equitable ?— How can a tax on 
realized wealth or capital be justified ? 

Let us take two cases : first, when income is not taxed ; sec- 
ondly, when income is taxed. 

First, when income is not taxed. It is claimed that the 
result of realized wealth affords the best practical measure of 
income or of productive faculty. Now, that such a claim in 
behalf of a property-tax should be conceded, or even seriously 
considered, clearly requires two things : first, that the ne'er- 
do-weels shall be comparatively few in number ; and secondly, 
that the disposition to save out of income, for the accumula- 
tion of wealth, shall be the general rule in the community. 
These requirements were met in the American colonies gener- 
ally. Barring the effects of intemperance, it was a rule with 
few exceptions that Americans in those times were disposed 
to labor, and to labor hard, that they might produce wealth ; 
while, so general was the desire of wealth, so stalwart the 
manhood of those times, so simple the habits of the people, 
so high the social importance attributed to the possession of 
capital, that all the surplus above decent, wholesome subsist- 
ence, after adequate provision for intellectual and religious 
culture, was likely to go towards accumulation. 

The mere statement of these elements of the case suffices to 
show the difficulties besetting such a principle of taxation, in 
its application to communities like those of the present day, 
with a less stringent public sentiment, with more extravagant 
modes of living, with a less general elevation of tastes and 
ambitions, with greater proneness to self-indulgence, with 
vast classes that do not even try to save. In such 
a state of society, to tax only that part of revenue which 
is laid by for future consumption, or to assist in the fur- 
ther production of wealth, is both politically unjust and eco- 



502 POLITICAL ECONOMY. 

nomically vicious, exciting to extravagance and discouraging 
frugality. 

Secondly. But if a tax be imposed on income, how can 
a property-tax be justified at all ? Have not the whole com- 
munity been once taxed upon income, as affording a measure 
of the ability to contribute to the public service, and shall now 
a portion of the wealth so excised be again subject to deduc- 
tion, on no other ground than that it has been saved, presum- 
ably to assist in future production ? 

605. The Purely Economic Theory of Taxation. — Mr. 
McCulloch, the author of one of the few works of value in the 
English literature of Taxation, boldly proposed to abandon 
altogether the attempt to follow out the equities of contribu- 
tion. I have already quoted his statement : " The distin- 
guishing feature of the best tax, is, not that it is most 
nearly proportioned to the means of individuals, but that it 
is easily assessed and collected, and is, at the same time, most 
conducive to the public interests." 

The line of reasoning which leads up to Mr. McCulloch's 
conclusions may be stated as follows : Government springs 
from injustice, and, in the constitution of things, must com- 
mit more or less injustice. It is of no use to attempt to 
pursue the equities of contribution; they will elude you. It is 
admitted that it is impossible to distribute equally the benefits 
of government ; why make the hopeless effort to apportion its 
burdens with absolute justice? Get the best government you can; 
maintain it at the least expense consistently with efficiency ; 
collect the revenue for the service by the most convenient, 
simple and inexpensive means. By undertaking to effect an 
equitable apportionment of the burden, through complicated 
methods or by personal assessment, you are not only likely to 
fail ; you are certain, at the best, to add to the aggregate cost 
of the service, and are in great danger of generating new and 
distinct evils by disturbing economic relations and obstruct- 
ing the processes of production and exchange. 

606. The Theory of the Repercussion or Diffusion of 
Taxes. — While writers on finance have commonly insisted 
that the equities of contribution should govern in assessment, 



DIFFUSION OF TAXES. 503 

a belief in the so-called Repercussion, or diffusion, of taxes 
has led economists very generally to give their approval to 
the system of indirect taxation, the growth of which forms 
the most marked feature of the fiscal history of the present 
century. 

Let the state, it is said, levy its contribution on such articles 
of general consumption as are most easily reached, or on such 
of the processes of production or exchange as lie most open 
to view, trusting to the laws of trade to distribute the burden 
over the whole body of the population. 

This plea raises the question of the Incidence, the ultimate 
incidence, of taxation. " I hold it to be true," said Lord 
Mansfield in his speech on taxing the Colonies, " that a tax 
laid in any place is like a pebble falling into and making a 
circle in a lake, till one circle produces and gives motion to 
another, and the whole circumference is agitated from the 
center." Taxes uniformly advanced on all like competing 
property," says Mr. Wells, " will always tend to equate them- 
selves, and will never be a special burden to those who origin- 
ally made the advances to the government." 

607. How do Taxes Tend to Diffusion ?— This, which 
may be called the Diffusion-theory of taxation, rests upon the 
assumption of perfect competition. It is true, to the full 
extent, only under conditions which secure the complete 
mobility of all economic agents. As far as members of the 
community are impeded in their resort to their best market 
by ignorance, poverty, fear, superstition, misapprehension, 
inertia, just so far is it possible that the burden of taxation 
may rest where it first falls. It requires, as Prof. Thorold 
Rogers has said, an effort on the part of the person who is 
assessed to shift the burden on to the shoulders of others. 
Not only is that effort made with varying degrees of ease or 
difficulty ; but the resistance offered may be of any degree of 
effectiveness: powerful, intelligent, tenacious, or weak, ignor- 
ant, spasmodic. The result of the struggle thus provoked 
will depend on the relative strength of the two parties ; and 
as the two parties are never precisely the same in the case of 
two taxes, or two forms of the same tax, it must make a dif- 



504 POLITICAL ECONOMY. 

ference upon what subjects duties are laid, what is the- severity 
of the imposition, and at what stage of pi-oduction or exchange 
the contribution is exacted. It is not, it never can be, a 
matter of indifference when, where, and how taxes are im- 
posed. " The ability to evade taxation," writes M. Say, " is 
infinitely varied, according to the form of assessment and the 
position of each individual in the social system. Nay, more, 
it varies at different times. There are few things so unsteady 
and fluctuating as the ratio of the pressure of taxation upon 
each class, by turns, in the community." 

608. M. Say's Views. — It has always seemed to me strange 
that J. B. Say should be cited, as he so often is, as an author- 
ity on the side of the Diffusion-theory of taxation. Not only 
in the paragraph from which I have quoted does he recognize 
the vital importance of the right " seating " of taxes ; but in 
his references to the essay of Canard, which had been crowned 
by the Academy (1802), he is even more pronounced. 
Canard had said that it is of little importance whether a tax 
press upon one branch of revenue or another, provided it be 
of long standing, because every tax in the end affects every 
class of revenue proportionally, as bleeding in the arm reduces 
the circulating blood in every portion of the human frame. 
To this M. Say rejoins that the object taken for comparison 
has no analogy with taxation. The wealth of society is not a 
fluid, tending continually to a level. It is, the rather, an 
organism, like a tree or a man, no part of which can be lopped 
off without permanently disfiguring and crippling the whole. 

609. M. de Parieu's Views.— M. de Parieu has given a 
chapter of his great work to the Incidence of Taxation. In 
respect to what he calls taxes levied upon the conditions of 
every human existence, he reaches the result that they have 
effects very obscure, and in a still greater degree subject to 
dispute. Where taxes are levied in cities upon the necessaries 
of life, he finds no considerable danger of evil effects, since 
there is a constant intercommunication between the laborers 
of towns and those of rural districts, and migration will soon 
restore the equilibrium after the disturbance created by the 
new impost. It is otherwise when a new tax is imposed 



INCIDENCE OF TAXATION. 5c5 

throughout the whole extent of a country. The emigration 
of laborers to foreign parts is only accomplished against a 
certain resistance, arising out of their habitudes and affections. 
It is always, moreover, accomplished at a definite loss and an 
indefinite risk. To throw taxes on consumption back upon 
the capitalist or the employer becomes, in M. de Parieu's 
judgment, a task very difficult and often wholly impracticable. 

610. Conclusion. — I reach the conclusion that, in a condi- 
tion of imperfect competition, we have no assurance that in- 
direct taxes will be diffused equably over the whole com- 
munity, leaving each class and each individual in the same 
relative condition as before the imposition. Something less, 
it may be much less, than a proportional contribution must 
result from the differing strength and opportunities of the 
several classes and individuals. The legislator can not, then, 
adopt the comfortable doctrine of the indifference of the 
place and the person where and on whom the burden shall be 
laid. His responsibility abides for the ultimate effects of the 
taxes he imposes. Whether with reference to the equities of 
contribution or to the general interests of trade and produc- 
tion, he is bound carefully to consider the nature and probable 
tendencies of every projected impost. 

XVII. 

PROTECTION VS. FREEDOM OF PRODUCTION. 

611. The Doctrine of Laissez-Paire.— The question of 
Protection, as against Freedom of Production — not, as it is 
commonly stated, against Freedom of Trade — is rarely dis- 
cussed, on both sides, upon purely economic principles ; perhaps 
has never been, in an actual instance, decided without the 
intermixture of political or social considerations. 

The arguments of those who have favored the policy of so 
far limiting the territorial division of labor (see par. 83), as to 
constitute industrial entities corresponding to existing polit- 
ical entities (which I take to be the real intent of what is 
called Protection) have been of every degree of vagueness ; 



506 POLITICAL ECONOMY. 

but it seems to me that the confusion of the public mind need 
not have existed, at least to so great an extent, had not the 
professional economists taken an unjustifiably lofty attitude on 
this subject, practically refusing to argue the question at all 
as one of national expediency, contenting themselves with 
occupying the high ground of Laissez-Faire. 

Now, that doctrine, although established by the older econ- 
omists to their own satisfaction, as containing a principle of 
universal application, and thus deemed by them a conclusive 
answer to all arguments specially directed to justify restric- 
tions upon international trade, has never been accepted, in 
the fullness of significance by them given it, throughout any 
wide constituency, not by any large proportion of the educa- 
ted classes, not even generally by publicists, or statesmen, or 
men of affairs. 

612. Opposition of the Economists to Factory Legisla- 
tion.— Thus, when factory legislation was first proposed in 
England, nearly the whole body of professional economists 
opposed any interference with the freedom of contract 
respecting labor. They asserted the entire competence of the 
laboring classes to protect their own interests. They declared 
that interference on behalf of the laboring classes could only 
be mischievous, in the long run, to the laborers themselves. 
They put themselves on record in the most formal manner 
against all measures of restriction upon factory and work- 
shop labor. They cast in their lot with the opposition to this 
class of legislation, and staked the reputation and influence 
of political economy upon their being right in this matter. 

Had they won upon that issue ; had the results of the fac- 
tory acts been proven deleterious to the interests of the work- 
ing classes themselves, or even to the industrial power of the 
kingdom, it would have been a rare triumph for the econo- 
mists, and their influence would have been greatly strength- 
ened. But it did not turn out so. Although in the first 
instance, that of the act of 1802, Sir Robert Peel, the elder, 
had been so solicitous not to violate the principle of the self- 
sufficiency of labor that he made the bill apply only to appren- 
tices, the wards of the state, the political rightfulness and the 



FREEDOM : 'J 'HE RULE. S«>7 

economic expediency of regulating the contract for labor so 
grew upon the public mind of England, that act after act 
extended the supervision of the state over factory and work- 
shop until the policy of restriction had vindicated itself to 
the complete satisfaction of the working-classes, even, in the 
main, of the master class, themselves, and of the statesmen 
of the kingdom and publicists almost without exception. 

613. Freedom the Rule: Restraint the Exception. — 
The fact that in the controversy over the factory acts the 
economists of the laissez-faire* school are proved to have been 
in the wrong, does not show, or go to show, that they are 
wrong in their opposition to laws in restraint of international 
commerce. It does not even create a presumption to that 
effect. 

Although the necessity of making exceptions to the rule of 
freedom of individual action has been established as com- 
pletely in respect to industry as in respect to politics, freedom 
of action is yet so far the condition of health and power and 
growth in the field alike of politics and of industry, that those 
who propose to make exceptions in either are bound to show 
cause for every such exception. A heavy burden of proof 
rests upon them. Their case is to be made, and made against 
a powerful presumption in favor of liberty, as that condition 
which hath the promise not only of that which now is, but, in 
a higher degree, of that which is to come. There is not and 

* " Now I beg you to remark the strange assumptions that underlie 
this reasoning. Human interests are naturally harmonious ; therefore we 
have only to leave people free, and social harmony must result ; as if it 
were an obvious thing that people knew their interests in the sense in 
which they coincide with the interests of others, and that, knowing 
them, they must follow them ; as if there were no such things in the 
world as passion, prejudice, custom, esprit de corps, class interest, to draw 
people aside from the pursuit of their interests in the largest and highest 
sense. Nothing is easier than to show that people follow their interest, 
in the sense in which they understand their interest. But between this 
and following their interest in the sense in which it is coincident with 
that of other people, a chasm yawns. That chasm in the argument of the 
laissez-faire scliool has never been bridged. The advocates of the doctrine 
shut their eyes and leap over it." — Prof. John E. Cairnes. 



508 POLITICAL ECONOMY. 

there can never be any positive virtue in restraint. Its only 
office for good is to prevent waste and save the misdirection of 
energy. There is no life in it, and no force can come out of it. 

That which is called " protection " operates only by restraint; 
it has and can have neither creative power nor healing 
efficacy. All the energy that is to produce wealth exists 
before it and without respect to it ; and just to the extent to 
which protection operates at all, it operates by impairing that 
energy, and reducing the sum of wealth that might be pro- 
duced if protection did not exist. 

I say, that might be produced, not that would be produced. 
The latter point may fairly be disputed between the free- 
trader, who should rather be called the free-producer, and the 
advocate of the system of restricted production. The force 
of the steam at the piston-head is less than the force of 
the steam in the boiler, less by all that is necessary to 
conduct it thither from the boiler ; yet it is the force of the 
steam at the piston-head, and not where it is generated, which 
moves the wheels of the engine. The harness hampers the 
movements of the horse ; but it is the harnessed horse that 
draws the load. Discipline operates directly to reduce the 
gum of the impulses by which soldiers are actuated, and, by 
consequence to reduce their individual energy; but a disciplined 
army will defeat a mob of many times its own numbers. 

614. What the Protectionist Has to Prove.— If the pro- 
tectionist can show that restraints imposed by law upon the 
industrial action of his countrymen, or the men of any country 
he chooses to take for the purposes of the debate, have the 
effect, not, indeed, to generate productive force, but to direct 
the productive force generated by human wants setting in 
motion human labor with a better actual result* than under 

*Much as I admire the pithiness and vigor of Prof. Sumner's argu- 
ment before the Tariff Commission, in 1883, I can not but think that he 
unduly disparages the losses to production which occur under the regime 
of free-exchange. I have in another place (pars. 99-109, and again 236 to 
243) adduced considerations which seem to me to justify a very serious 
view of the extent and importance of these losses. Let the protectionist, 
if he can, show good grounds for believing that under the system he 
proposes there would be a better outcome. 



NATIONALITY AND INDUSTRY. 509 

the rule of freedom, he will make his case. But this is to he 
proved, not taken for granted ; and it is to be proved only by 
sound and serious argument, not by strenuous assertion and 
senseless clamor. 

615. Why Should Industrial Correspond to Political En- 
tities ? — In proceeding to establish the importance of checking 
the extension of the territorial division of labor at the boundary 
lines of nationalities, the protectionist writers have been ser- 
iously embarrassed from the lack of reasons to give why indus- 
trial entities ought to correspond to political entities. Had they 
undertaken to show that every million or five millions of peo- 
ple might advantageously be organized into a separate indus- 
trial entity, having either no commercial intercourse at all 
with communities on the outside, or a commercial intercourse 
much reduced and retarded ; or had the protectionist writers 
undertaken to show that every ten or twenty square degrees 
upon the earth's surface, whatever the number of inhabitants, 
should become an industrial entity, trade within the limiting 
parallels and meridians being unrestrained and even encour- 
aged, while trade across those lines should be deemed in a 
higher or lower degree mischievous ; or had these writers 
undertaken to show that every important river basin or 
drainage system should be constituted an industrial entity, in 
as great a degree as possible independent of others, they would 
have had a much less difficult task. A good deal might be said 
upon the theme that the world-wide extension of the principle 
of the division of labor needs to be crossed and checked by arti- 
ficial obstructions to prevent certain economic and social evils. 

We have shown (par. 227 to 243) that grave industrial 
mischiefs may originate in this principle, though which pro- 
ducer and consumer are set apart, often by a vast distance, 
sometimes by half the circumference of the globe ; that mis- 
understandings may arise between producer and consumer 
which will result in a smaller production of wealth, a lower 
satisfaction of human wants, and that these misunderstandings 
are sometimes aggravated by suspicion or panic with the 
most deplorable consequences. The fact is incontestable, 
and it would be easy to exaggerate its importance. 



51° POLITICAL ECONOMY. 

But when the attempt is to prove that the principle of the 
division of labor should be allowed to extend itself freely 
within the bounds of nationality but not beyond them, addi- 
tional difficulties of a grave character are encountered at the 
outset, in the great and, from the economic point of view, 
unaccountable irregularity and whimsicalness with which the 
surface of the earth is divided among independent 
sovereignties. One nation comprises two millions of inhabi- 
tants, like Denmark, Greece or Chili ; another ten, like Mexico, 
Brazil or Siam ; another thirty, like Italy or Japan ; another 
sixty, like the United States ; another eighty, like Russia ; 
another three hundred and fifty, like China. The territory 
occupied by one nation crosses and includes two, three or five 
great river systems ; in other cases, one river system embraces 
the territory of two, three or five nations. A stream which a 
boy can wade may form the dividing line of two independent 
states ; a third state may collect its revenues across the Atlan- 
tic and the Pacific oceans, and its magistracy send their war- 
rants alike to Hudson's Bay and into the South Sea. One 
people may stretch from North to South across sixty degrees 
of latitude ; another from East to West, through half the daily 
journey of the sun. One country may be occupied by a popu- 
lation as homogeneous as the inhabitants of some old city • 
while under the same flag, and subject to the same laws, may 
live the representatives of many races : some dressed in 
the latest Paris fashion, others tattooed upon the naked 
skin ; some using the telephone, others the assegai ; some 
finding their choicest amusement in the Wagnerian opera, 
others in the war dance that opens the feast of human 
flesh. 

616. The United States as an Instance. — It will readily 
appear that the protectionist writers have a difficult task in 
establishing the necessity of drawing the lines of industrial 
circumvallation along the boundaries of empire. 

Take the United States for example. Here are thirty-eight 
states trading among themselves with the utmost activity, the 
exchange of commodities and services being as free as the 
movements of the air ; and in this freedom all good citizens 



THE STRONG AND THE WEAK. 5 11 

rejoice.* But this condition of things is made, by the doc- 
trine under examination, to be dependent entirely upon the 
political relations of these states. Were they under different 
governments, the exchange of commodities and services 
which now promotes the general wealth and the general 
welfare would be fraught with mischief and possible ruin. 

It is, of course, possible that some new analysis of the con- 
ditions of production may yet disclose the law which thus 
makes trade within the limits of sovereignty beneficial, and 
trade across the boundaries of separate states deleterious to 
one or both parties ; but thus far assertion coupled with vitu- 
peration has taken the place of the analysis required. 

617. Protecting the Strong against the "Weak In the old 

world, the argument for pi'otection is based on the importance 
of protecting the industrially weak against the industrially 
strong ; and I am not certain that something might not be said 
for this. Russia strives to protect her labor against the better 
paid labor of Germany ; Germany, in turn, strives to protect 
her labor against the vastly better paid labor of England. 
Among all fully settled countries, the rule, without exception 
so far as I am aware, is that that country in which the higher 
wages are paid offers its products at lower prices than the 

* " If it be asserted that states which pursue different industries can not 
afford to trade freely with one another, here we have them, New York 
and Pennsylvania, Massachusetts and Minnesota, Maine and Louisiana. 
If it be asserted that states with like industries can not afford to trade 
freely with one another, here we have them, Indiana and Illinois, Iowa 
and Minnesota, Massachusetts and Rhode Island, Alabama and Mississippi. 
If it be said that small states can not afford to trade freely with great 
empires, here are New York and Connecticut, Pennsylvania and Delaware. 
Why do not the great states suck the life out of the small ones ? If it be 
said that new states, with little capital, and on the first stage of culture, 
can not afford to exchange freely with old states having large capital and 
advanced social organization, here are New York and Oregon, Massachu- 
setts and Idaho. How can any territories ever grow into states under 
the pressure ? If it be said that a state which relies on one industry can 
not afford to exchange freely with one which has a diversified industry, 
here are Pennsylvania and Colorado, California and Nevada, any of the 
cotton states and any of the Northeastern states." — W. G. Sumner^ 
" Protection in the United States." 



512 POLITICAL ECONOMY. 

competing products of countries where the lower wages are 
paid. 

In the United States, however, the argument for protection 
has based itself on the assumed necessity of protecting the 
strong against the weak. In Australia and Canada it is the 
same. It is alleged to be essential to the maintenance of the 
high wages prevailing in these countries, that the products of 
the " pauper labor of Europe " shall not be sold freely in 
their markets. 

Why is it that the plea of those who desire to check tha 
extension of the division of labor on the lines of nationality, 
suddenly changes as they pass from old and fully settled 
countries, to countries but recently, and perhaps still but par- 
tially, occupied and cultivated ? 

618. "Why Wages are High in New Countries.— The ex 
planation is found in the fact that the populations of what 
we call " new countries," that is, countries where an inade* 
quate population is applying progressively to fresh fields 
advanced methods and machinery, possess an immense advant- 
age in the conditions of living over the populations of " old 
countries," where the land has long been fully occupied, where 
the capabilities of the soil, even on fields of small natural pro- 
ductiveness, are heavily taxed to furnish subsistence to the 
inhabitants, and where systematic, continuous manuring has 
to be practiced in order to keep the land in condition. 

The enomous profit of cultivating a virgin soil without the 
need of artificial fertilization, and the abundance of food and 
other necessaries of life enjoyed by the agricultural class have 
tended continually to disparage mechanical industries in the 
eyes alike of the American capitalist and of the American 
laborer. 

619. The Competition of the Farm with the Shop.— It has 
been the competition of the farm with the shop which has, 
from the first, most effectually retarded the growth of manu- 
factures in the United States. A population which is privi- 
leged to live upon a virgin soil, cultivating only the choicest 
fields and cropping these through a succession of years without 
returning any thing to the land, can live in plenty. If that 



NATURAL PROTECTION. 513 

population possess the added advantage of great skill in the 
use of tools and great adroitness in meeting the large and the 
little exigencies of the occupation and cultivation of the soil, 
the fruits of agriculture will still further be greatly increased. 
The dietary of an American farmer, cultivating his own land 
with the aid of his growing sons, would amaze a peasant from 
any portion of Europe. An abundance of nutritious food is 
and has been, ever since the revolutionary period, the sure 
condition of the life of the agriculturist in the United States. 
It was not with our fathers, even in New England, a struggle 
for the necessaries of life, but for social decencies and what, 
in any old country, would have been called luxuries. 

Now, the mode of living on the part of the agricultural 
population has necessarily set a minimum standard of wages 
for mechanical labor. With an abundance of cheap land, with 
a population facile to the last degree in making change of 
avocation and of residence, few able-bodied men are likely to 
be drawn into factories and shops on terms which imply a 
meaner subsistence than that secured in the cultivation of the 
soil. 

620. The Hand Trades — There are certain classes of 
mechanical pursuits, however, which, by their nature, secure 
to those who follow them a minimum remuneration fully up 
to the standard of the agricultural wages of the region. Such, 
for instance, are the trades of carpenter, blacksmith and mason, 
in which the work is of a kind which can only be done upon 
the spot. The house can not be built abroad and imported for 
the farmer's use ; the wagon must be mended near the place 
where it broke down ; the horse must be shod, the tools 
sharpened, by the artisans of the neighborhood. If, then, the 
farmer will have such services performed, he must admit those 
who perform them to share his own abundance ; he must pay 
wages or prices which will attract men, and those, by necessity, 
men exceptionally intelligent and skillful, into those trades. 
Hence we find the mason, the blacksmith, the plumber, the 
carpenter, the house painter, the cobbler, in every part of the 
United States, receiving wages which bear no relation what- 
ever to the wages paid for the same class of services in other 



514 POLITICAL ECONOMY. 

countries, but which stand in a very exact relation to the 
rewards of agricultural labor here. 

Nor has it ever been found necessary to encourage or stimu- 
late these trades for the good of the country. What states- 
man ever introduced into Congress a bill intended to increase 
the number of carpenters or blacksmiths, or to enhance their 
wages ? 

621. Personal and Professional Service. — But, again, 
there are certain classes of services, of a personal or profes- 
sional nature, which have also secured for those rendering 
them a participation in the abundance enjoyed by the tillers 
of the soil in the same region. The remuneration received by 
the members of these classes, whether called the wages of 
domestic servants, or the fees of physicians and lawyers, or 
the salaries of schoolmasters and clergymen, or the profits of 
retail trade, has been out of all relation to the remuneration of 
similar services in other countries, and has amounted to just 
what I have termed it, a p>articipation in the abundance en- 
joyed by the agricultural population. Since these services 

could only be performed upon the spot, the agriculturists have 
been obliged, if they would have the services rendered, to pay 
for them, out of the large surplus of their own produce, at 
least enough to make these professions and avocations equally 
desirable with their own, uncertainty of result, loss of time in 
preparation, expense of education and training, healthfulness 
and agreeableness of work, etc., being taken into account; and, 
since the agricultural classes have desired that these services 
should be performed, and have been willing to pay for them 
on the scale indicated, there has never been any call for Con- 
gressional action to secure the requisite number of lawyers,, 
physicians, clergymen, schoolmasters, domestic servants or 
retail tradesmen. 

622. The Factory Industries.— But now we note that there 
are still other important classes of services to be rendered, 
respecting which the rule changes. The remuneration of the 
persons rendering these services no longer has reference to* 
the abundance of agricultural production in the several sec- 
tions of the United States ; is no longer irrespective of the 



THE FACTORY INDUSTRIES. 515 

remuneration of similar classes elsewhere. These persons 
are not, necessarily, admitted to a participation in the fruits 
of American agriculture. 

The services referred to are such as can be performed with- 
out respect to the location of the consumer of the product. 
They are nearly identical with what we call, in the technical 
sense of the term, manufactures. 

Whenever the American farmer wants a pane of glass set, 
or a pair of boots mended, or a horse shod, he must pay some 
one, his neighbor, enough for doing the job to keep him in his 
trade and to keep him out of agriculture, in the face of the 
great advantages of tilling the soil in New York, or Ohio or 
Dakota, or wherever else the farmer in question may live ; 
but how much he shall pay the man who makes the pane of 
glass, or the pair of boots, or the set of horseshoes, will depend 
upon the advantages of tilling the soil, not where he himself 
lives, but where the maker of the horseshoes, the boots, or the 
glass may live. 

If he will have the work done he must pay some one, some- 
where, enough to keep him in his trade and out of agriculture ; 
but not necessarily out of New York agriculture, or Ohio 
agriculture, or Dakota agriculture ; but, perhaps, out of Eng- 
lish agriculture, or French agriculture, or Norwegian agricul- 
ture, under the the requirements of constant fertilization, deep 
plowing and thorough drainage, and subject to that stringent 
necessity which economists express by the term, " the law of 
Diminishing Returns." 

Now, to offset and overcome the inducements to engage in 
agriculture, even in Merry England, is a different thing, a very 
different thing, from keeping a man in his trade and out of 
agriculture in the United States. 

The American agriculturist, having large quantities of 
grain and meat, of cotton and tobacco, left on his hands, after 
providing ample subsistence for his family, and even after 
hiring the carpenter, mason and blacksmith, the schoolmas- 
ter, lawyer and doctor, for as much time as he requires 
their respective services, and still further, after putting a good 
deal into farm implements and increase of stock, is desirous of 



5l6 POLITICAL ECONOMY. 

obtaining with the remainder sundry articles more or less nec- 
essary to health, comfort and decency. To him it makes no 
difference whether the articles he requires are made on one 
side of the Atlantic or on the other ; but it makes a great dif- 
ference what he is obliged to pay for them ; how much of his 
surplus grain and meat, tobacco and cotton must go to secure 
a certain definite satisfaction of his urgent and oft-recurring 
wants. If he must needs pay some one to stay out of Ameri- 
can agriculture and do this work, his surplus will not go so 
far as if he were allowed to pay some one to stay out of Eng- 
lish agriculture to do it. 

623. What the State Can Do — But here the State enters 
and declares that it is socially or politically necessary that 
these articles, these nails, these horseshoes, this cotton or 
woolen cloth, or what not, shall be made on this side of the 
Atlantic. That necessity the agriculturist, as consumer, 
can not be expected to feel ; he does not care where the things 
were made ; he only wants them to use. He does not care 
who makes them ; he does not even care whether they are 
made at all ; they would answer his purpose just as well were 
they the gratuitous gifts of nature, spontaneous fruits of the 
soil, or the sea, or the sky. Whatever his own economic 
theories may be, he will, as purchaser, every time select the 
cheapest article which will precisely answer his need. He 
will not, of his own motion, pay more for an article because it 
is made on his side of the Atlantic than he could get an 
equally good article for, bearing the brand of Sheffield or Bir- 
mingham or Manchester. But if the State says he must, he 
must ; and consequently the American maker of this article 
is by force of law admitted to a participation in the abund- 
ance enjoyed by the American agricultural class. The tiller 
of the soil is now compelled, by the ordinance of the State, to 
share his bread and meat with the maker of nails or of horse- 
shoes, of cotton or of woolen cloth, just as he was before com- 
pelled by the ordinance of Nature to share his bread and meat 
with the blacksmith, carpenter and mason, the schoolmaster, 
lawyer and doctor. 

It is perfectly true, therefore, as the protectionist asserts, 



SOCIALISM. 517 

that a tariff of customs duties upon foreign goods imported 
into new countries tends to create and maintain high rates of 
wages in the factory industries. But for protective duties, 
those articles which, in their nature, can be readily and 
cheaply transported will be produced predominantly in coun- 
tries where the minimum standard of mechanical wages is set 
by agricultural conditions far less favorable than those which 
obtain in the United States, in Canada, or in Australia. 

But while the law thus can and does create high rates of 
wages in factory industries, it does not and it can not create 
the wealth out of which that excess of manufacturing wages 
over those of older countries is paid. That wealth is created 
by the labor and capital employed in the cultivation of the 
soil. 

xvin. 

SOCIALISM. 

624. Difficulty of Defining Socialism. — It is not easy 
to define the word socialism, for the purposes either of con- 
troversy or of description. It is, perhaps, impossible to give 
a definition which shall be satisfactory to all. One man invid- 
iously calls another a socialist, only to receive the same ap- 
pellation himself from a third person differing from him in 
political opinion. Let us, however, do the best we can, in the 
confusion which prevails on this subject, to characterize 
socialism. 

We find that term applied to "a great variety of political 
schemes, in all of which is present one quality, in higher or 
lower degree. This quality is the essence of socialism; and, 
as it is found more and more fully developed, the socialist 
character of any political scheme becomes more and more dis- 
tinctly pronounced. We may apply the term, socialistic, to 
this quality. 

625. Meaning of the Word Socialistic— What then does 
the word socialistic signify ? I answer, it is properly applied 
to an unconscious tendency or a conscious purpose to extend 



518 POLITICAL ECONOMY. 

the powers of the state beyond a certain necessary, minimum, 
line of duties, for a supposed public good, under popular im- 
pulse. It may be added, though rather in explanation than 
in qualification of our definition, that the supposed public 
good in view generally involves a greater or a smaller change 
in the distribution of wealth, as effected under the rule of 
competition and individual initiative. This, however, is not 
always the case. 

626. Anarchism. — We have spoken of extending the powers 
of government beyond a necessary, minimum, line of duties. 
What is that line ? On this question opinions differ, but I 
deem it conducive to a clear understanding of our subject to 
conceive that line as drawn along the Police Powers of the 
state. Those, indeed, who call themselves Anarchists hold 
that government is not a necessary means of social existence ; 
but that, on the contrary, government produces most of the 
very evils which are made the excuse for government. They 
profess to believe that government represses individual activi- 
ties for good, at many points, and paralyzes forces which 
otherwise would continually operate to ameliorate the condi- 
tions of life, to harmonize social relations, and to give inspir- 
ation and impulse to human efforts seeking at once the good 
of the individual and of the community. The Anarchist even 
asserts that certain vicious and destructive appetites and 
passions, which have been held to be inherent in human nature 
and to place the necessity of government beyond the possi- 
bility of question, are, in fact, generated by government 
itself, and would soon disappear in a state where no man pre- 
sumed to make a law for another or to place any restraint 
upon his actions.* Apart, however, from the small and as 
yet insignificant body of men known as Anarchists, it is held 
by all persons, of high or low degree, of much or little political 
experience, that government is at least a necessary evil ; and 
most men cheerfully submit to whatever restraints or sacri- 
fices are involved in its maintenance. There are certain func- 



* The reader who may be interested to see the most and best that can 
be said in behalf of this strange doctrine of anarchy, is referred to an 
article by Prince Kropotkin in the Nineteenth Century for August, 1887. 



SOCIALISTIC MEASURES. 5x9 

tions known as the police powers, which are, with substantial 
unanimity, admitted to belong to government. These are, 
speaking in a very general way, the protection of life, person 
and property and the preservation of the civil peace. These 
powers clearly embrace the repression of obtrusive vice and 
the protection of the common air and the common water from 
pollution. The term socialistic can not be properly applied to 
any measure undertaken, in good faith, for the attainment 
of these objects. In a highly organized industrial or social 
state, the police powers will naturally be exercised through 
agencies and instrumentalities unknown in a more primitive 
condition ; but these are not, on that account, to be considered 
in any degree socialistic, so long as they are directed toward 
the end indicated. 

627. Examples of Socialistic Measures. — Whenever and 
wherever, for any supposed public good, measures are under- 
taken or proposed, from a popular impulse, or in obedience to 
a popular demand, which carry, or would carry, the functions 
of government beyond the line we have drawn, the term social- 
istic is properly to be used, not as a term of reproach or con- 
tumely, but as a strictly descriptive title. The line of the 
police powers may, in any given instance, be transcended by 
much or by little; the object sought may be thoroughly prac- 
ticable or wildly fanciful; the results may be highly beneficial 
or deeply injurious to society; but every measure or proposal 
of the nature we have described is socialistic. Thus, public 
schools are distinctly socialistic. Education is a matter 
proper to individual initiative and enterprise, within the family 
or, by voluntary association, within larger groups. It is 
only during the last twenty years that this function has been 
assumed by government in a country so free, prosperous and 
enlightened as England. When this great step was taken 
it was distinctly and unmistakably socialistic, yet not the less 
meritorious and beneficial. That step had been taken, gener- 
ations before, in the United States, with the consent of all 
parties and all classes, and with the happiest results in peace, 
order and prosperity. On the other hand, the government in 
England owns and operates the telegraph, a policy from which 



520 POLITICAL ECONOMY. 

we in the United States shrink with reluctance as dangerously 
socialistic. 

628. Public roads and bridges also exhibit the social- 
istic character in a highly marked degree. In a very primitive 
state of society, where, yet, all the police powers are fully 
exercised, each man looks out for his own paths of travel or 
transport, and maintains his own communications with friends 
and neighbors, across the commons or through the forest. 
Even after roads are laid out, and, later still, are graded, 
drained and perhaps paved, at great expense, and streams and 
ravines are bridged, this work continues to be regarded as 
altogether a matter for private enterprise. Individuals or 
associations lay out the roads and build the bridges, collecting 
toll from every one who passes over them. Those who use 
the roads much pay much; those who use them little pay little; 
those who stay at home pay nothing at all. At last* there comes 
a time when it is seen that, though this function naturally 
belongs to individuals, and has indeed been exercised by in- 
dividuals with a reasonable degree of success, yet a great 
public advantage will result from making these avenues of 
communication free to all and supporting them thereafter at 
the public expense. The step thus taken is purely, highly 
socialistic. The responsibility, the labor, the expenditure 
involved in these undertakings pass from private citizens to 
public officials. Individuals no longer pay for this service 
according to the proportion in which they enjoy it. Each 
contributes, whether he will or not, to the construction and 
maintenance of roads and bridges, which he may use much or 
may not use at all. 

629. Protectionism is purely and highly socialistic. Its 
purpose is so to operate upon individual choices and aims, so 
to influence private enterprise and the investments of capital, 
as to secure the building up, within the country concerned, of 
certain branches of production which could not be carried on, 

* The general movement by which roads and bridges have almost uni- 
versally been made free, began, even in the most enlightened countries, 
only sixty or seventy years ago. 



THE SOCIALISTS. 521 

or would grow but slowly, under the rule of competition and 
individual initiative. With this object in view, government 
begins by preventing the citizen from buying where he can 
buy cheapest ; it compels him to pay ten, thirty or fifty per 
cent, advance, it may be, upon the prices at which he could 
otherwise purchase ; it even assumes the right to make exist- 
ing industries support the industries which are thus to be called 
into being. Not incidentally, but primarily and of purpose, 
it affects vitally every man's industrial conditions and 
relations. It does this for a supposed public good. 

630. The Socialists.— We have, perhaps, sufficiently illus- 
trated the significance of the word socialistic. What then is 
socialism ? Perhaps we had better first ask, who is a 
socialist ? Under our definition, the advocacy of a socialistic 
act or measure will not necessarily characterize a socialist. 
Thus, protection, as we have said, is socialistic. Yet the pro- 
tectionist is not, as such, a socialist. Most protectionists are not 
socialists. Many protectionists are, in their general views, as 
strongly anti-socialist as men can well be. 

The socialist is one who, in general, distrusts the effects of 
individual initiative and enterprise ; who is readily convinced 
of the necessity or utility of the assumption, by the State, of 
functions which have hitherto been left to personal choices 
and personal aims ; and who, in fact, approves and advocates 
many and large schemes of this character. 

The person of whom all this could be said might properly 
be called a socialist ; yet there are many such persons who 
would wish, after enlarging the powers of government at 
many points, correcting, as they conceive it, many of the 
infirmities and evil liabilities of society by force of law, and 
introducing incentives and impulses which, as they believe, 
can only be administered by the organized power of the State, 
still to leave individual initiative and enterprise the general 
rule of life. The extreme socialist is he who would make the 
State all in all : private enterprise, personal choices and aims 
being lost in the general movement of a society dominated 
and directed by a majority vote. In the view of the extreme 
socialist, the powers and the rights of the State are the sun? 



/*i 



522 POLITICAL ECONOMY. 

of all the powers and all the rights of the individuals who 
compose it ; and government becomes the organ of society in 
respect to all its interests and all its acts. 

631. Socialism. — The term " socialism " may, then, prop- 
erly be applied (1) to the aggregate of many and large 
schemes for the extension of the powers of the State, actually 
urged for present or early adoption ; or (2) to a programme 
contemplated, at whatever distance, for the gradual replace- 
ment of private by public activity ; or (3) to an observed 
movement or tendency of a highly marked character in the 
direction indicated. 

( It will be seen that socialism and anarchism are in theory 
absolutely antipodal. The former would proceed by mag- 
nifying the powers of the State and enlarging the sphere 
of its operation, until personal choices and aims should 
wholly disappear in respect to all matters in which others, 
or the community as a whole, could possibly be interested. 
The complete establishment of socialism would, therefore, 
involve a tyranny more far-reaching and searching than 
that of the most absolute despotism ever founded among 
men. Anarchism, on the contrary, aims at the complete 
abolition of government: the removal of every form of 
restraint, leaving personal aims and choices wholly unchecked 
by law or authority, subject only to moral influences, to 
persuasion and to the force of public sentiment. 

632. Socialism vs. Communism. — The distinction between 
Socialism and Communism is not to be drawn so easily. The 
two schemes have, necessarily, much in common ; while the 
boundaries of that which, theoretically, each has to itself 
have been much confused by vague or passionate treatment. 
In a previous publication,* I have sought to» express as clearly 
as the nature of the case would allow, the essential differences 
between Socialism and Communism, as follows : 

1st. Communism confines itself mainly, if not exclusively, 
to the one subject matter — wealth. On the other hand, 
Socialism, conspicuously, in all its manifestations, in all lands 

* Scribner's Magazine. January, 1887. 



SOCIALISM VS. COMMUNISM. 523 

where it has appeared, asserts its claim to control every inter- 
est of human society, to enlist for its purposes every form ot 
energy. 

2nd. So far as wealth becomes the subject matter both of 
Communism, on the one hand, and of Socialism, on the other, 
we note a difference of treatment. Communism, in general, 
regards wealth as produced, and confines itself to effecting an 
equal, or what it esteems an equitable distribution. 

Socialism, on the other hand, gives its first and chief atten- 
tion to the production of wealth ; and, passing lightly over 
the questions of distribution, with or without assent to the 
doctrine of an equal division among producers, it asserts 
the right to inquire into and control the consumption of wealth 
for the general good, whether through sumptuary laws and 
regulations, or through taxation for public expenditure. 

3rd. Communism is essentially negative, confined to the 
prohibition that one shall not have more than another. 
Socialism is positive and aggressive, declaring that each man 
shall have enough. It purposes to introduce new forces into 
society and industry, to put a stop to the idleness, the waste 
of resources, the misdirection of force, inseparable, in some 
large proportion of instances, from individual initiative ; and 
to drive the whole mass forward in the direction determined 
by the intelligence of its better half. 

4th. While communism might conceivably be established 
upon the largest scale, and has, in a hundred experiments, 
been upon a small scale established, by voluntary consent, 
Socialism begins with the use of the powers of the State, and 
proceeds and operates through them alone. It is by the force 
of law that the Socialist purposes to whip up the laggards 
and the delinquents in the social and industrial order. It is 
by the public treasurer, armed with powers of assessment and 
sale, that he plans to gather the means for carrying on enter- 
prises to which individual resources would be inadequate. 
It is through penalties that he would check wasteful or mis- 
chievous expenditures. 

If what has been said above would be found true, were one 
studying Communism and Socialism as a philosophical critic, 



5 2 4 POLITICAL ECONOMY. 

much more important will be the distinction between them to 
the eyes of the politician or the statesman. Communism is., 
if not moribund, at the best everywhere at a stand-still, gen- 
erally on the wane ; nor does it show any sign of returning 
vitality. On the other hand, Socialism was never more full 
of lusty vigor, more rich in the promise of things to come, 
than now. 

633. It seems only needful to add, that, while the doctrines 
of Anarchism, Socialism and Communism are respectively 
held by not a few sincere and disinterested men, of a high 
order of intelligence, large numbers of those who embrace 
one or the other of these systems do so with no appreciation 
of the differences between them, being influenced wholly by 
a general discontent with the results of the existing social 
and industrial order, either as affecting themselves or as con- 
trolling the fortunes of their class. In addition to these, 
every public demonstration of socialistic or communistic or- 
ganizations almost inevitably draws out a swarm of " lewd 
fellows of the baser sort," who for the time attach themselves 
to that party, out of a general hatred of law and order, or in 
the hope of plunder, or from a delight in riot and mischief. 



INDEX. 



K^ The References are to Sections, not to Pages. 



Argyle, Duke of : restrictions on 
the contract for labor, 248 

Anarchism, 626 

Arithmetical w. Geometrical pro- 
gression, 892-3 

Art : Political Economy as an art 
(a branch of statesmanship) dis- 
tinguished from political econ- 
omy as a science, 27-31 

Assignats, so called, of French Re- 
volutionary period, 219, 445 

Athens, progressive taxation in, 600 
-. Austria, paper money, 443 

Authority, legal, excluded from 
our definition of value, 8 

Ability, as the rule of taxation, 
595-7, [See, also, Faculty] 

Abstinence, the creator of capital, 
87-93 ; interest, the reward of 
abstinence, 288 

Accumulation, how influenced by 
the rate of interest, 288 

Agriculture — deemed by the phy- 
siocrats the sole source of wealth, 
48 ; subject to the condition of 
" diminishing returns," 49-53 ; 
plea that manufactures should 
be built up artificially to save 
exportation of the properties of 
the soil, 56-9 ; follows the pas- 
toral condition in natural order 
of development, 63 ; the fluctua- 
tions in agricultural products 
render them a defective standard 
for deferred payments, 188-90 ; 
competition of agriculture with 
manufactures in new countries, 
618-23 

Alcoholic beverages, English ex- 
penditure upon, 406n 

Alison, Sir A.; the potato, 404n 

Amsterdam, Bank of, 523 

Andersen, J., announces law of 
rent, 265 



Babbage, Charles : cost of the ma- 
terials of the iron manufactures, 
53 

Bacon, Lord : the true labor of 
philosophy, 24 ; the burden of 
taxation, 414; on usury, 419, 423n 

Bagehot, Walter : influence of in- 
convertible paper money on for- 
eign exchanges, 220, 565 ; the 
early Italian banks, 522 ; bi- 
metallism, 568 

Balance of Trade, 545-53 

Banking Functions, the, 522-8; the 
banking agencies, 529 ; the State 
participating in the profits of 
banking, 577 

Banking principle, the, so-called, 
vs. the currency principle, 225-6 

Bank Money, Chap. 6, Part III 

Bank of England, 222, 225 ; its 
foundation, 522 

Bases of Taxation, 590 

Bastiat, F. : confuses ethical and 
economical reasoning, 37 ; the 
economical harmonies, 346 ; the 
stoiy of Jacques Bonhomme, 
412 

Barter, the primitive form of ex- 
change, 161-2 

Beaulieu, Leroy, domains, 576n 

Belgium, underfed laborers, 68 

Bentham, Jeremy: escheat vice tax- 
ation, 573 ; approves banking 
monopolies, 578 ; attacks judi- 
cial fees, 581 

Bequest, [See Successions] 

Bi-Metallism, 559-71 

Birth-rate, diminished by increase 
of economic desires, 397-401 

Bowen, Francis: the value denomi- 
nator, 183n 

Brabazon, Lord : inadequate food 
of French factory hands, 68 

Brassage, 196 



526 



INDEX. 



Brassey, Thomas, Sir : superiority 
of English labor in railway con- 
struction, 79 

Brodie, George : sale of offices by 
Charles I. , 575n ; monopolies, 
5:8 

Building lots, rent of, 280 

Bullion, its relation to coin, 193- 
200, [See Seigniorage] 

Burke, Edmund : nothing so great 
an enemy to accuracy of judg- 
ment as want of classification 
and distribution, 44 ; the fiscal 
motive to paper money issues, 
441 

Cairnes, John E.: The character 
and logical method of Political 
Economy, 18-20 ; asserts for it 
the dignity of a science, 25 ; im- 
portance of the law of ' ' diminish- 
ing returns," 48 ; the friction of 
retail trade, 149 ; relief of over- 
crowded occupations, 342 ; in- 
difference of the rate of profits, 
373 ; laissezfaire, 613; co-opera- 
tion, 428 ; bi-metallism, 568 

Calvin, John, on usury, 418 

Cameralistic science, its subject 
matter, 359 

Canard, N. F.: the diffusion of 
taxes. 608 

Cancellation of indebtedness, by 
banks and clearing houses, 524 

Capability, productive, of a com- 
munity, Chap. 4, Part II 

Capital, Chap. 3, Part II ; partial 
immobility of capital, 104 ; the 
remuneration for its use, i. e., 
interest, Chap. 3, Part IV. ; rela- 
tion of capital to the scheme of 
co-operation, A'lQ-8 ; relation of 
capital to wages, 320,334-6 [With 
reference to taxation, see Wealth] 

Carey, H. C: his attacks upon the 
doctrine of rent, 484-92 

Catallactics, the word offered by 
Archbishop Whately, as a sub- 
stitute for political economy, 43 

Celibacy, [See Marriage] 

Chad wick , Edwin : the cellar popu- 
lations of the English cities, 71 

Charles I. , of England ; sale of 
offices, 575 ; of monopolies, 578 

Chastity, female, how affected by 
the provisions of the English poor 
laws, 450 



Cheap vs. Dear Pood, 404 

Cheap money, is inconvertible 
paper money cheap ? 214-6 

Cheerfulness, as contributing to 
labor power, 76-8 

Cherbuliez, A. E. : domains, 576 

Chevalier, Michel ; money econo- 
mizes labor, 164 ; applies the 
term Brassage to the actual cost 
of coinage, 196n ; industrial ef- 
fects of an increase of the money 
supply, 445n ; bi-metallism, 568 

Child, the, its relation to the sub- 
sistence of the family, 387-8 

Civilization tends to diminish the 
sum of values, 12 ; effects of 
money in promoting civilization, 
164 

Clamageran, J. J.: the physio- 
cratic theory of taxation, 583n 

Clearing-house, the bankers' bank,. 
524 

Climate : a good climate is riot 
capital but a favorable condition 
of production, 86 

Clothing, its relation to subsistence, 
384 

Cobden, Richard : the commuta- 
tion of the feudal burdens upon 
land in England, 500 

Coinage, 168,179-80 ; cost of, i. e., 
seigniorage, Chap. 4, Part III 

Coin basis of bank money, [See 
Reserve, Specie] 

Coin, debasement of ; seigniorage, 
Chapter 4, Part III 

Combination, in economics op- 
posed to competition, 129 

Comfort, ideas of, developed in 
the progress of society, 19, 395-9 

Commerce, the old time theory 
that it could be beneficial to but 
one party, 3 [See also Exchange 
and International Trade] 

Commodities, distinguished from 
services, 247-9 

Communism, 632 

Community of goods, what would 
become of wealth ? 11 

Competition defined, 129 ; relation 
of competition to the doctrine 
of rent, 268-76 ; relation of com- 
petition to the doctrine of inter- 
est, 298 ; to the doctrine of 
wages, Chap. 6, Part IV, also 
465-73 



INDEX. 



5 2 7 



Cornte, Aug.: denies to political 
economy the character of a 
science, 25-6 

Consumers and producers, possi- 
ble misunderstandings between, 
Chap. 7, Part III 

Consumption of wealth: Prof. Les- 
lie holds that the neglect of this 
department of inquiry is due to 
the assumption of a beneficent 
order of nature, 35 ; consump- 
tion as a department of political 
economy, 381-2, Part V, passim 

Consumptive vs. productive co- 
operation, 432-3 

Continental currency, so-called, of 
the American revolution, 207, 
209, 219 

Contributions to the treasury of 
the State, 572 ; (compulsory: see 
Revenue of the State and Tax- 
ation) 

Co-operation : an effort to get rid 
of the entrepreneur, 108 ; erro- 
neous conceptions of many econ- 
omists, 316-7, 426-8 ; anticipated 
benefits of, 429-3i ; practical 
difficulties, 432-6 

Corn rents, 188-90 

" Corn Laws" (English), 83 

Corners, so-called, as a tool of the 
speculating class, 140, 364 

Courcelle-Seneuil, J. G. : deprecia- 
tion not a necessary result of in- 
convertibility, 21 3n ; the theory 
of bank money, 224 

Creasy, Sir Edward, the feudal 
burdens on land, 498 

Credit sales, the characteristic, 186; 
their great importance in modern 
exchange, 187 ; the multiple 
standard of deferred payments, 
459-64 

Crises, [See Panics] 

Cultivation, descending to inferior 
soils, [See Diminishing Returns] 

Currency principle, the so-called 
vs. the banking principle, 224-6 

Custom, its influence in modifying 
law or competition, 19; is always, 
in theory, opposed to competi- 
tion, 129 ; its effects on price, 
145-6 

Darwin, Charles : the power of 
geometrical increase, 393 

Dear vs. Cheap Food, 404 



Debasement of the coin, Chap. 3, 
Part III 

Debtor class, their demand for 
paper money issues, 445 

Decency, ideas of, developed in 
the progress of society, 19 ; 
power to check population, 394, 
400-1 

Deferred payments, standard for, 
[See Standard, etc.] 

Definitions, in economics, not less 
valuable because certain objects 
may fall across the lines of de- 
markation, 6 ; difficulty which 
political economy encounters 
from the use of terms taken from 
common speech, 42-3 

Degradation of the laboring class, 
through unequal competition, 
339-47, 466 

Demand and supply, defined, 125 ; 
desire is not demand, 126 ; ope- 
ration of demand and supply il- 
lustrated, 125-40 ; (Money), 170 

Demand, international, equation, 
of, 153 

Denominator of value, 182-3; how 
about paper money ? 210 

Departments, the four departments 
of political economy, 44 ; rea- 
sons for their retention, 111, 
247-9 

Deposits, fictitious, as a means of 
evading usury laws, 422 [See 
Safe Deposit] 

Deposit and discount, the great 
banking function, 526 

Depreciation, not a necessary re- 
sult of debasement of coin, 197, 
201 ; or of inconvertibility of 
paper, 213 

DeQuincey, Thomas: " Profits are 
the leavings of wages," 327 

Desire is not demand, 126 

Desires, economic, tend to multi- 
ply as fast as gratuity replaces 
value in the case of articles 
which were the subject of for- 
mer desires, 13-4, 63, 66-7, 92-3, 
Chap. 2 and 3, Part V 

Destruction of wealth, keeping 
down accumulations of capital, 
110 ; popular notion that it 
stimulates production, 411-3 

Deterioration, liability to, as affect- 
ing price, 143 



INDEX. 



Devon, Earl : Irish Commission of, 
1844, 394 

Diet, diversified, taste for, as an- 
tagonizing the procreative force, 
398 

Difference, economic, what con- 
stitutes an economic difference ? 
133 

Diffusion of taxes, 606-10 

Diminishing returns in agricul- 
ture, 51-4, 257 

Discipline creates no force, but may 
prevent waste, 348-51 

Discount and deposit, the great 
banking function, 526 

Discredit of money, its influence 
on the money demand, 200-1 

Distribution, as a department in 
political economy, Chap. 1, Part 

Division of Labor [See, also, Ter- 
ritorial Div. of Lab.], how it 
originates, 80 ; how it becomes 
a source of productive power, 
81-3 ; gives rise to exchange, 112; 
evil possibilities attendant upon, 
Chap. 7, Part III 

Domains, as a source of revenue 
to the State, 576 

Douglass, William : the debtor 
class in early Massachusetts, 445 

Dress, as a form of consumption, 
384 

Dynamics of wealth, found in con- 
sumption, 382 

Economics, [See Political Econ- 
omy] 

Efficiency of the individual la- 
borer, dependent on several 
causes, 65-78 ; varying efficiency 
of labor in different countries, 
79 ; relation to wages, 456 

Emigration of capital, 299 ; of la- 
bor, 298-9 

Employer, the, [See Entrepre- 
neur] 

Employment, regularity of, as an 
element of wages, 320 

Employed laborer, [See Laborer] 

England, insufficient food of agri- 
cultural laborers, 68 ; contrasted 
with India and Russia as to the 
efficiency of its laboring popula- 
tion, 79 ; its industrial organiza- 
tion, 252 ; rents kept down by 
public sentiment, 269 ; its usury 



laws, 419 ; poor laws, 447-51 ; 
relation of wages to capital, 
454 ; factory legislation, 467 ; 
its strikes, 467 ; progressivity in 
taxation, 601 

English School of Political Econ- 
omy, so called, 17 ; erroneous 
views of English economists re- 
garding the relation of wages to 
the product of industry, 32ii 

Entrepreneur class, the, their func- 
tion, 85, 231, 245 ; as claimants 
to a share of the product of in- 
dustry, 252, 330-2, Chap. 4, 
Part IV, also 474-82 ; the State 
as entrepreneur, 577 

Equation of international demand, 
153 

Equity, political, its relation to 
political economy, 36 

Equities of contribution to the 
State, 583 [See also Taxation] 

Escheat, as a source of State reve- 
nue, 573 

Esprit de corps in industry, 84 

Ethics, relation to economics, 19, 
36 

Exemptions from income, prior to 
taxation, 600-1 

Exchange, the old-time theory 
that it could be beneficial to but 
one party, 3; arises from the di- 
vision of labor, 112, 236-7; its 
reaction upon production, Chap. 
7, Part III 

Exchange, the science of, this term 
offered as a substitute for Polit- 
ical Economy, 5-6 

Exchange, as a department of 
Political Economy, Part III ; 
how distinguished from distribu- . 
tion, 247-9 

Exchange, (Trade) International, 
Chap. 2, Part III 

Exchanges, Foreign, 541-58 ; rela- 
tion to Bi-metallism, 563-5 

Exhaustion of the soil, 56-8 

Expenditure, as the basis of taxa- 
tion, 592-4 

Factory laws, 471-3 

Faculty, as the basis of taxation, 
595-7 

Family, the formation of, 386-7 ; 
solidarity of, 390 

Fawcett, H. : insufficient food of 
West of England laborers, 68, 



INDEX. 



5 2 9 



Cottier rents in Ireland, 273n ; 
differing wages in different 
localities, 273 ; the doctrine of 
the Wage Fund, 453n. 

Fecundity, made by M. Comte a 
test of a true science: does politi- 
cal economy bear this test ? 25 

Fees, as a means of revenue, 581 : 

Feudal burdens on land, how 
commuted ? 498 

Fiat money, [See Inconvertible 
Paper Money] 

Final utility, 181, 139 

Financiering, as a banking func- 
tion, 522 

Fines and forfeitures, as a source of 
revenue to the State, 574 

Fittest, survival of, [See Sur- 
vival] 

Fixed incomes, relation to the 
multiple standard, 464 

Food, [See, also, Subsistence] : its 
relation to labor power, 66 ; the 
primary form of capital, 87, 97. 

Force, productive, cau not be lost 
out of nature, but may be lost 
out of man's reach, 56 

Forced circulation, generally a 
characteristic of government 
paper money, 207 

Forced sales, sometimes caused by 
usury laws, 423 

Form-value, 46 

France : underfed factory hands, 
68 ; repression of population, 
401 ; progressivity in taxation, 
600-2 

Francis, John : the city banks of 
London, 526 

Free, distinguished from gratuit- 
ous coinage, 195 

Free trade and exhaustion of the 
soil, 56 ; and the territorial divi- 
sion of labor, 57, 613-23 [See 
Protection vs. Freedom of Pro- 
duction, Part VI.] 

French economists apt to confuse 
ethical and economic reason- 
ing, 37 : right in their views of 
the relation of wages to the pro- 
duct of industry, 326n 

Fullarton, J. : the theory of bank 
money, 224 

. Gallatin, Albert : bank money be- 
comes a sort of legal tender, 
223n 



Gangs, agricultural, so-called, in 
England (children), 342 

Gamier, Joseph : progressivity in 
taxation, 6<>0 

Genoa, bank of (St. George), 522 

Geometrical vs. arithmetical pro- 
gression, 392-4 

George, Henry, his ' ' Progress and 
Poverty," 506-21 

Germany, its railroad system, 577 

German school of political econo- 
my, so-called, 17 

Gibbon, E., likens money to 
letters, 164 

Gilbert's Act (English Poor Laws), 
448-9 

Girdlestone, Canon : the diet of 
the laborers of Devonshire, 68 

Girardin, Emile de : voluntary 
contributions, 572n 

Gladstone, Wm. E. : his Budget 
Speeches, 586n 

Glut, [See Overproduction] 

Gluttony : regarded by Mr. Mill 
as a perpetually antagonizing 
principle to the desire of wealth, 
21 

Gold [See Precious Metals ; in its 
relations to Silver, see also Bi- 
metallism] 

Gouge, Wm. M. : the heory of 
bank money, 225 

Government, as producer and con- 
sumer, 357-60, 414-6 ; its revenue, 
and the means of obtaining it, 
572-84 

Government administration of pro- 
ductive property, 505, 576-7 

Grain, as money, 189-90 

Gratuity, relation to value, 12-3 

Gratuitous, distinguished from free, 
coinage, 195 

Greed, often antagonistic to the en- 
lightened pursuit of wealth, 23, 
378 

Greenbacks, so-called, of the 
United States, 209, 211, 444 

Gresham's Law, 181 

Ground rents, 283 

Hallam, H. : the penal code of Ire- 
land, 271 

Hamilton, Alex. : the danger of 
paper money issues, 444n 

Hard times, so-called, their cause, 
235-42 

Harmonies, the economic, 344-6 



53o 



INDEX. 



Harrison, Fred'k ; the small suc- 
cess of productive co-operation, 
434 

Harvesting, subject to the condi- 
tion of diminishing returns, 53n 

Hastings, George W. : necessity of 
the workhouse test, 452 

Hazardous risks of capital, how 
compensated, 293-7 

Health is not wealth, though per- 
haps better than wealth, 10 

Hearn, Wm. E. : substitutes the 
term Plutology for Political 
Economy, 43 ; explains the 
former idleness of the Scottish 
people, 78 

Hebrews, ancient, usury forbid- 
den, 417-8 

Higgling in the market, 149-50 

Hoffmann, J. G. : the literature of 
taxation, 585 

Holland, underfed laborers, 68 

Hopefulness in labor, as an element 
of productive power, 76-8 

Hunter state, the, 60 

Huskisson, Wm. : repeal of the 
laws against combinations, 467 

Immobility of capital and labor 
[See Mobility, etc.] 

Income as the base of taxation, 
[See Revenue] 

Inconvertible Paper Money, Chap. 
5, Part III 

Increment, the unearned, of land, 
257, 265, 493, et seq. 

India — the efficiency of its labor- 
ing population contrasted with 
that of England, 79 ; increase 
of population and condition of 
the people, 394 ; possible relation 
of taxation to production, 415 

Indifference of the rate of profits, 
a doctrine, 373-80 

Indolence, regarded by Mr. Mill 
as a perpetually antagonizing 
principle to the desire of wealth, 
21 

Inflation (money), 198-204, 213, 
219-20, 441-5 ; tendency to infla- 
tion inhering in political money, 
439-45 

Inglis, H. : the city houses of Ire- 
land in 1834, 70 

Injuries, economic, tend to remain, 
346-7 

Injustice, only becomes a subject 



for the consideration of the econ- 
omist when it issues as an eco- 
nomic force influencing the ac- 
tions of men with respect to 
wealth, 36 

Institutions, how far shall they be 
considered by the economist ? 
19 

Insurance of the principal, an im- 
portant element of interest, 293 

Intellectual elements of supply and 
demand, 147 

Intelligence, not wealth, 9-10; as a 
source of productive power, 
72-4 

Interest, as a share in the product 
of industry, 252, 332-6, 368-9; 
Chap. 3, Part IV [See Usury 
Laws] 

International Trade: international 
values, 151-8 

International distributionof money, 
176 

International division of labor 
[See Territorial, etc.] 

Invention facilitated by the divis- 
ion of labor, 82 

Ireland, the economic mischiefs of 
its land tenure almost irrespect- 
ive of considerations of political 
equity, 36; inadequate shelter of 
the laboring population, 70; the 
" starving season," 94; rents: re- 
lation of the landlord and tenant 
class, 271-4; increase of popula- 
tion and state of the peasantry 
prior to the famine, 394 

Irish, their traditional idleness at 
home due to unfair laws, 78 

Jarvis, Edward : varying viability 
of the several nations of Europe, 
320 

Jevons, W. S.: illustration of the 
descending scale of utility, 131 ; 
but one price for a commodity, 
132-3; substitution of one com- 
modity for another, in use, as 
affecting price, 142n; the British 
coin, 180; the denominator of 
value, 182; advocates a tabular 
or multiple standard, 191, 463; 
repudiates the doctrine of the 
wages fund, 326; the laissez 
faire doctrine, 380; the law of 
wages, 326; the dynamics of 
wealth, 382n; his Money and the 



INDEX. 



53* 



Mechanism of Exchange, 524n; 
government interference with 
labor, 349, 352,471; fluctuations 
in the value of gold, 1789-1874, 
440; bi-metallism, 568 

Johnson, S. W. Prof.: on the re- 
newal of the soil by " weather- 
ing " and nitrification, 59 

Johnston, J. F. W. Prof.: the 
constituents of the soil taken 
away in the crop, 56 

Knies, Prof.: his classification of 
values, as time- value, place-value 
and form-value, 46" " "•'■ 

Knights of Labor, Part VI 

Kropotkin, Prince : on Anarchy, 
626 

Labor: employed in agriculture 
subject to the condition of di- 
minishing returns, 49-52 ; not so 
when employed in mechanical 
industries, 53-4; as one of the 
three primary agents of produc- 
tion, Chap. 2, Part II; varying 
efficiency of labor, 65-79; divis- 
ion of, 80-4; partial immobility 
of labor, 104; relation of labor 
to value, 119-24 

Laborer, the, as a claimant to a 
share of the product of indus- 
try, 252; Chaps. 5 and 6, Part 
IV; the residual claimant upon 

- the product of industry, 322-86 

Laissez faire, the doctrine, 344-52, 
380 

Land, its tenure, how far of con- 
sequence to the economist ? 19, 
36; one of the three primary 
agents of production, 47-8; its ca- 
pability of increased production, 
49-54; influence of a popular 
tenure upon population, 401 [See 
building lots, pastures, water 
privileges, wood lots, mines; see 
also, Nationalization of the Land ; 
see, also, Chapter on Rent, Part 
IV, and Attacks on the Doctrine 
of Rent, Part VI] 

Landlord, the, as a claimant to a 
share in the product of industry, 

. 252, Chap. 2, Part IV, 328-34, 
368-70 

Latin-Union, so-called, its mone- 
tary league, 195, 571 

Laws, how far shall they be con- 
sidered by the economist, 19 



Leave-them-as-you-find-them rule 
of taxation, 590 

Leslie, T. E. Cliffe: influence of 
natural theology on political 
economy, 35; influence of a 
popular tenure of the soil upon 
population, in France, 401 

Liverpool, Lord: ancient bankers, 
522 

Loans, [See Interest and Usury 
Laws] 

Locke, John, on usury, 424 

Lotteries, as a means of revenue to 
the State, 579 

Luxury, ideas of, developed in the 
progress of society, 19 ; its ap- 
pearance in human societies, 
398-9 

Machinery : great differences 
among different peoples in the 
capacity of using it, 73-4 ; intro- 
duction of machinery as tending 
to set producers and consumers 
apart, 231-6 

Malthus, T. R. : the law of popu- 
lation, 391, 395, 402 

Man, the economic, 21 

Manchester, or Laissez Faire, 
school of economists, 348 

Mansfield, Lord : diffusion of 
taxes, 606 

Manufactures : not subject to the 
condition of diminishing returns, 
53-4 ; plea for building up local 
manufactures to prevent waste 
of soil, 56-9 ; relation to agricul- 
ture, in new countries, 618- 
23 

Market, what is it ? 134 

Market price, its relation to nor- 
mal price, 139 

Marriage : early marriages in Ire- 
land, 394 ; discouraged by econ- 
omic desires, 397 

Marshall, Alfred and Mary Paley, 
Economics of Industry : honesty, 
a part of the ' ' personal wealth " 
of a country, 9 ; possible savings 
of Asia and England contrasted, 
93n ; influence of "plant " on the 
prices of commodities, 144n ; the 
course of speculation and the 
cause of panics, 232 ; effect upon 
accumulation of a low rate of 
interest, 288n ; origin of business 
profits, 311 



532 



INDEX. 



Martineau, Harriet : effects of a 
premium on illegitimacy, 450 

Massachusetts paper money, 443 

Mastership in production, 85, 105-9, 
231, 239 [See chapter on Profits 
in Part IV ; also article Co- 
operation in Part VI] 

Materials, the third form of capital, 
96-7 

May, Sir E : the English Crown 
lands, 576n 

McCulloch, J. R. : varying fer- 
tility of soils, 254 ; relation of 
wages to profits, 327n ; wages 
and cheap food, 404 ; govern- 
mental expenditure, 414 ; effects 
of an increase of the money sup- 
ply, 445n ; proposes the purely 
economic theory of taxation, 583, 
605 ; his treatise on taxation and 
the funding system, 586 

Measure of value, so-called, [See 
Denominator of Value] 

Mechanical industry, not subject 
to the condition of diminishing 
returns, 53-4 

Medium of exchange, money serves 
as the, 162 ; how about paper 
money ? 209 

Metals as money, 166 

Metals, the precious, as money, 
167 ; the irregularity of their 
production, 188-9, 440, [See also 
Bi-metallism and Multiple Stan- 
dard] 

Middlemen in Ireland, 272 

Mill, John Stuart : correctness of 
the popular conception of wealth, 
6 ; fails to observe distinction 
between wealth and property, 
15 ; his statement of the premises 
of the Ricardian school, 21 ; he 
replies to Comte's criticism foun- 
ded on the consensus of the social 
phenomena, 39 ; recognizes ex- 
change as a department of 
political economy, llln ; the 

^ friction of retail trade, 149 ; the 
equation of international de- 
mand, 153 ; the unearned incre- 
ment of land, 284, 497-500 ; doc- 
trine of the wage fund, 453 

Mines, rental of, 281 

Mints, of various countries, 180n 

Mobility of capital and labor, how 
far secured, 104, 339-45 



Money, Chaps. 3, 4, 5 and 6, Part 
III; interest paid, in general, not 
for the use of money, but of 
other forms of capital^ 286 [See, 
also, Bank Money, Inconvertible 
Paper Money, Political Money, 
Bi-metallism] 

Monometallism [See Bi-metallism] 

Monopolies, as a source of revenue 
to the State, 578 

Monopoly value, 121 

Moral considerations, how far do 
they concern the economist ? 19, 
36" 

Moral elements of supply and de- 
mand, 147 

Mosaical code, prohibits usury, 
417 * 

Mortgages, are they wealth, or only 
property ? 15 

Motives, economic, shall all be 
taken by the economist, or only 
a few leading motives ? 16-22 

Multiple standard, for deferred 
payments, 191, 459-64 

Napoleon, avoided the use of 
paper money, 214 

"National" Political Economy, 
so-called, 32; why should indus- 
trial correspond to political enti- 
ties ? 615-6 

Nationalization of the Land, 493- 
505 

Natural Theology: its relation to 
political economy, 35 

Nature, the assumption of a benef- 
icent constitution of, as influ- 
encing the pursuit of political 
economy, 35 

Nature, human: how far shall the 
economist seek to comprehend 
it, and include it in the premises 
of his reasoning ? 16-22 

Neison, Dr. : varying mortality of 
the several trades and professions, 
320 

New countries, so-called, why 
wages are high in them, 618- 
23 

Nicholls, Sir George : effects of 
Gilbert's act, 449 

Nitrification, so-called, as a means 
of renewing the soil subject to 
culture, 59 

Nominal w. real wages, 321 

Nominal vs. real cost of labor, 321 



INDEX. 



533 



Normal price: its relation to mar- 
ket price, 137-8 

Norman, Geo. Warde : the theory 
of bank money, 225 

North, Dudley: free coinage, 195 

Occupation, change of, as a means 
of relieving the labor market, 
342 

Offices, sale of, 575 

One price only for a commodity, 
132 

Opinion, public: influence on 
wages, 353-4 

Organization of industry, 84-5 ; as 
affecting price, 144 

Ortes, G. : intimates the laws of 
population, 395 

Over-production, what the term 
means, 408-10 

Overstone, Lord : the theory of 
bank money, 225; the course of 
speculation and over trading, 
232; fictitious deposits, 422 

Panics, the causes of, 232-3, 239 ; 
in the United States, 243 

Paper money [See Bank Money 
and Inconvertible Paper Money] 

Par of exchange : what it is, 543 ; 
between gold-using and silver- 
using countries, 561 

Parieu, E. de : the literature of 
taxation, 585; the diffusion of 
taxes, 609 

Pastures : relation to arable lands, 
277 

Pastoral state, the, 61 

Pauperism, 446-52 

Perry, A. L. Prof.: doctrine of 
the indifference of the rate of 
profits, 373, 379; doctrine of the 
wage fund, 453 

Petty, Sir Wm. : his theory of tax- 
ation, 592 

Physiocrats, the French, treated 
political economy as an art, 29 ; 
deemed agriculture the sole 
source of wealth, 48 ; their the- 
ory of taxation, 583 

Physiology of man, how far of 
consequence to the economist ? 
16-20 

Picking, or selecting, the coin, 179 

Place-value, 46 

Plant, so-called, its existence as 
affecting price, 144 

Plutology, the term offered by 



Prof. Hearn as a substitute for 
political economy, 43 
Political economy, its character and 

logical method, Part I 
Political money, 439-45 ; [See 
also, Inconvertible Paper Money] 
Politics, and economics, 349 
Polo, Marco : the Chinese paper 

money, 206 
Poor laws, [See Pauperism] 
Pope, the, as a capitalist, 572 
Population increases as tribes pass 
from the hunter to the pastoral 
state, and again as they initiate 
agriculture, 60-3 ; relation of sub- 
sistence to population, Chap. 
1-3, Part V ; effect of the increase 
of population in driving culti- 
vation down to inferior soils, 
51-4, 99, 257, 271-4 ; [See, also, 
The Nationalization of the Land, 
Part VI 
Potato philosophy of wages, 404 
Practical men, so-called or self- 
called, their readiness to assert 
their opinions on economic ques- 
tions, 41 
Prediction, capability of, made by 
M. Comte a test of a true science, 
25 
Prejudices, popular, their influ- 
ence on political economy, 40 
Premises of political economy, 16- 

(GO 

Price, relation to value, 115 ; but 
one price for a commodity, 132 ; 
normal and market price, 137-9 ; 
price the agent in the inter- 
national distribution of money, 
176 ; relation of rent to the price 
of land, 261 ; to the price of 
agricultural produce, 262 ; re- 
lation of profits to the price of 
manufactured produce, 311 

Price-current, need of, 182-3 ; how 
about paper money ? 210 

Price, Bonamy, objects to drop- 
ping the word wealth, 5 ; depre- 
ciation not a necessary result of 
inconvertibility, 213 

Procreative force, the, its capa- 
bilities, 391-3 ; its persistence, 
394 ; antagonized by economic 
desires, 397-401 

Production of wealth, 44 ; Part 
II ; modes of production, 46 ; 



534 



INDEX. 



agents of production, 47 ; pro- 
ductive capability of a commun- 
ity, Chap. 4, Part II ; reaction 
of exchange upon production, 
Chap. 7, Part III ; reaction of 
distribution upon production, 
Chap. 8, Part IV 

Producers and consumers, their 
relations and possible misunder- 
standings, Chap. 7, Part III 

Productive co-operation, [See Co- 
operation] 

Production, cost of, how related to 
value, 119-124, 151-8 

Profits, of the entrepreneur, his 
motive in production, 231,239 ; 
profits, a share of the product of 
industry, 252, Chap. 4, Part IV; 
profits and rent are species of 
the same genus, 307-10 ; profits 
do not form a part of the price 
of manufactured products, 311 ; 
are not obtained by deduction 
from wages, 312 ; doctrine of 
the indifference of the rate of 
profits, 373,379 ; in co-operation 
the laborers aim to secure the 
entrepreneur's profits, 376-7 

Progressive taxation, 600-2 

Property, relation to wealth, 15 

Protection vs. freedom of produc- 
tion, 611-23 

Protectionist writers, hold that 
each country has a political 
economy of its own, 32 ; make 
much of the exhaustion of the 
soil, 56-8 [See, also, Protection 
vs. Freedom of Production] 

Purdy, Fred. : variations in wages 
throughout England, 356n 

Purveyance, as a means of revenue, 
580 

Quasi taxes, 578-81 

Quesnay, M., his school of econo- 
mists, 29, 48 

Raguet, Condy : bank money in 
the United States, 223, 225 

Railways of Germany, 577 

Real vs. nominal wages, 319-20 

Real vs. nominal cost of labor, 321 

Realized wealth, (taxation) [See 
Wealth] 

Redeemability of paper money, 
what it implies, Chaps. 5 and 6, 
Part III 

Registration of land, the require- 



ment adds virtually to the facility 
of transfers, 351 

Rent, as a share in the distribution 
of the product of industry, 252, 
Chap. 2, Part IV ; its relation to 
the price of land, 261 ; its rela- 
tion to the price of agricultural 
produce, 262 ; tends to rise with 
growth of population, 257, 289, 
497 ; rent and profits are species 
of the same genus, 307-10 ; does 
rent belong in equity to the com- 
munity ? 284 [See also National- 
ization of the Land, and Attacks 
upon the Doctrine of Rent, 
Part VI] 

Repercussion of taxes, [See Diffu- 
sion, etc.] 

Reserve, specie, of bank money, 
223 ' 

Restriction, so-called, the English, - 
207,444 

Retail trade, the friction of, 148-9 

Revenue (individual), as the basis 
of taxation, 589, 591, 598 

Revenue of the State, 572-84 

Ricardo, David : his school of 
political economy, 22 ; treats 
political economy as a science, 
not as an art, 30 ; his views on 
seigniorage, 197-200 ; deprecia- 
tion not a necessary result of 
inconvertibility, 213n ; his rela- 
tion to the doctrine of rent, 265 ; 
[See also, Attacks on the Doctrine 
of rent, Part VI] relation of 
wages and profits, 327 ; the in- 
cidence of a land tax, or tax on 
rents, 499 

Rogers, J. E. T. : rents in Eng- 
land, 269 ; wages and cheap 
food, 427n; co-operation, 427n ; 
the insurrection of the peasantry 
under Richard II, 469 ; the dif- 
fusion of taxes, 607 

Roscher, Wm. : definition of capi- 
tal, 87n ; proportion of produce 
consumed upon the farm, 112n ; 
advocates tabular or multiple 
standard, 191 ; the variety of 
man's economic wants, 395n ; 
his reference to H. C. Carey, 487 

Russia, the efficiency of its labor- 
ing population contrasted with 
that of the English, 76; paper 
money, 443 



INDEX. 



535 



Safe deposit, as a banking func- 
tion, 526 

Sanitary conditions, as affecting 
the efficiency of labor, 69, 70 

Saving [See Abstinence] 

Say, J. B.: progressive taxation, 
600 ; diffusion of taxes, 607-8 

Scarcity value, 121 

Schools of political economy, 16- 
23 

Science, does political economy 
attain this dignity ? 25 ; distinc- 
tion between political economy 
as a science and as an art, 27-8 

Scotch, once an idle people, 78 

Scotland, inadequate shelter of the 
laboring population, 70 

Seasons, their influence on regu- 
larity of employment, 320 

Seigniorage, Chap. 4, Part III 

Selecting, or picking, the coin, 
179 

Senior, N.W.: relation of value to 
wealth, 7 ; relation of gratuity 
- to value, 12 ; relation of rights 
or credits to wealth, 15 ; distinc- 
tion between political economy 
as a science and as an art, 29 ; 
labor not essential to value, 120 ; 
money is " abstract wealth," 184; 
opportunities for extra earnings, 
319 ; the consumption of wealth, 
381 ; relation of famine to war, 
395n ; the order of succession of 
human desires, 396 ; what is a 
luxury ? 399 ; his statement k of 
the law of population, 395 

Sentiment, personal, excluded 
from definition of value, 7 ; sen- 
timent and political economy, 
38 ; sentiment as modifying the 
influence of competition, 129 

Services, distinguished from com- 
modities, 247 ; services of the 
possessors of health, skill, 
strength and intelligence may be 
the subjects of exchange, though 
those qualities can not be, 
9-10 

Settlement, (parochial), English 
law of, 451 

Shelter, its relation to subsistence, 
384 

Shocks, economic, their propaga- 
tion through the industrial and 
commercial body, 237-43 



Silver, [See Precious Metals ; in its 
relation to Gold, see, also, Bi- 
metallism] 

Sismondi, M. : rents in Tuscany, 
270 ; influence of a popular ten- 
ure of the soil upon population, 
401 

Skill is not wealth, though it may 
become the means of acquiring 
wealth, 9-10 

Slave labor, the cause of its ineffi- 
ciency, 77 

Smith, Adam : his Wealth of Na- 
tions, effect upon the relations 
of States, 3 ; treated political 
economy mainly as an art, 30 ; 
his economic writings influ- 
enced by his views as a professor 
of natural theology, 35 ; bank 
money, 223 ; the immobility of 
labor, 340 ; masters always in a 
combination not to raise wages, 
468n ; the bank of Amsterdam, 
523 ; voluntary contributions to 
the State, 572 ; inefficiency of 
government administration of 
productive property, 576; his 
maxims regarding taxation, 586-9 

Social dividend theory of taxation, 
588 

Socialism, 624-33 

Sociology : its relation to political 
economy, 39 

Soil, the, a fund for the endow- 
ment of the human race, 55 

Soldiers, their services economic in 
England, non-economic in Ger- 
many, 8 

Solidarity of the family, as related 
to natural selection, 390 

Specie reserve of bank money, 
[See Reserve] 

Speculation, the course of, 232-3 ; 
the speculating class and their 
gains, 361-4 

Steuart, Sir James, treated political 
economy as an art, 30 

Standard of deferred payments, 
usually called standard of value, 
184-90 ; how about paper money ? 
218-9 ; how about bimetallic 
money ? 440-5, [See also Multi- 
ple Standard] 

Statistician, the economic, to be 
distinguished from the econo- 
mist, 34 



536 



INDEX. 



Stock, influence of a stock of a 
commodity on its price, 139-43 

Storage, necessity of, as affecting 
price, 143 

Strikes, 352, 468-70 ; co-operation 
would abolish strikes, 430 

Structure in industry, 103-9 

Subsistence : 86-7, 94, 97, 453-5 ; 
in its relation to population, 
Chapters 1-3, Part V 

Substitution of one commodity for 
another in use, as affecting price, 
142 

Successions, limitations upon and 
taxation of, 573 

Sumner, W. G. Prof. : the doc- 
trine of protection, 614, 616 

Supply and demand, 125-140 ; 
(Money) 174 

Supply is not equivalent to stock, 
140 

Survival of the fittest, how far 
carried out in the human family, 
390 

Sympathy with labor, [See Opin- 
ion, Public] 

Tabular standard, for deferred pay- 
ments, [See Multiple Stand- 
ard] 

Taxation, its place in political 
economy, 357-60; Bentham'sand 
McCulloch's view of taxation as 
stimulating production, 414-6; 
how taxation may be considered, 
582-4; the principles of, 585-610 
[See, also, Quasi Taxes] 

Territorial division of labor, 83; 
the protectionist argument for 
limiting it, 61 1 -6 

Theology, natural: the proper at- 
titude of the economist towards 
it, 35 

Thompson, Prof. R. E.: exhaus- 
tion of the soil, 56 

Thornton, Henry: the country 
banks of England, 525 

Thiinen, J. H. von: the principle 
of diminishing returns applies 
even to the harvesting of crops, 
53n 

Titles, sale of, 575 ^ 

Time value, Mt '} "'J " 

Tocqueville, A. cle: sale of offices 
in France, 575 

Tooke, Thomas: depreciation not 
a necessary result of inconverti- 



bility of paper money, 21 3n; the 
theory of bank money, 224 

Tools, the second form of capital, 
95; their importance in produc- 
tion, 98 

Torrens, Robert : the theory of 
bank money, 225 

Trades-Unions, 465-6 [See, also, 
Knights of Labor, Part VI] 

Transportation, in its relation to 
rent, 259-60; in its relation to 
prices, 176 

Tributes from colonies, dependen- 
cies and conquered nations, 574 

Truck, 473 

Turgot, A. R. G. : the only physio- 
crat who treated political econ- 
omy as a science ; his strictly 
scientific method, 29 

Twiss, Travers : the potato in Ire- 
land, 404n 

Under-production, what it results 
from, 407-10 

Under-consumption, so-called, 409 

Unearned increment of land [See, 
Increment, etc.] 

United States: the laboring popu- 
lation well fed and well shel- 
tered, 68-70; capable of using 
delicate and intricate machinery, 
75; its money, 223-5 [See; also, 
Greenbacks]; panics, 243; rents, 
268; increase of population, 392; 
its usury laws, 419; its banking 
agencies, 528-9, [see, also, the 
National Banking System, Part 
VI ] ; considered with reference 
to the question of protection. 
616-22 

Usury and usury laws, 368-9, 
417-2. r . 

Utility, how related to value, 116; 
useful, in economics, does not 
mean beneficial, 117 [See Final 
Utility] 

Value: related to wealth as attri- 
bute to substance, 7; defined, 8-9, 
114; relation to price, 115; to 
utility, 116-7; is it a momentary 
phenomenon ? 118; how related 
to labor, 119-24; value is gov- 
erned by the relation of demand 
and supply, 125; the value of 
money, 169, 197-203, 212 

Voluntary contributions [See Con- 
tributions] 



INDEX. 



537 



"Wa-ffe fund theory, 327 [See, also, 
Part VI] 

Wages: as a share of the product 
of industry, 252; are not dimin- 
ished by the sums received by 
the landlord class as rent, 263, 
323; or by the sums received by 
the employing class as profits, 
312, 325; the law of wages, 
Chaps. 5 and 6, Part TV; why 
wages are high in new countries, 
618-23 

Walker, Amasa : the theory of 
bank money, 225; co-operation, 
427n 

Warren, W. F. : voluntary contri- 
butions to the State, 572 

Waste of materials (avoidable) an 
important element in production, 
72, 330-3 

Waste of soil, 256; some degree in- 
evitable, 58; its relation to rent, 
278 

Water privileges, rent of, 2*78 

Wealth: the subject matter of po- 
litical economy, 1-3; definition, 
4; relation of wealth to value, 
7; [See, also, throughout, Capi- 
tal] ; as the basis of taxation, 
604 

Weathering, so-called, as a means 



of renewing the soil subject to 
culture, 59 

Welfare, human, not the subject 
matter of political economy, 10 

Wells, D. A. : exemption in taxa- 
tion is confiscation, 599 

Whately, Richard: popular preju- 
dices aroused by political econ- 
omy, 40; substitutes the term 
catallactics for political econ- 
omy, 43; profits a (species of the 
same genus as rent, 306 

Whewell, William : his definition 
of science, 25 

Wife, the,relation to the subsistence 
of the family, 386 

William III, of England, dissipates 
the estates of the crown, 576 

Wilson, Dr. : on usury, 419 

Wilson, James: depreciation not a 
necessary result of inconverti- 
bility of paper money, 213n; the 
theory of bank money, 224 

Wolowski, Louis: no paper money 
in Poland, 206 

Wood lots, rent of, 282 

Workhouse test of pauperism, 
447-50 

Young, Arthur : ' ' the magic of 
property," 77; expenditure as 
the basis of taxation, 592 



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